The impact of Investor Leverage on Stock Market Spillover Effects:Evidence from a Natural Experiment

66 Pages Posted: 18 Sep 2020 Last revised: 15 Jul 2021

See all articles by Qing Ye

Qing Ye

Xi'an Jiaotong-Liverpool University (XJTLU)

Shengjie Zhou

Monash University; Xi'an Jiaotong-Liverpool University (XJTLU)

Date Written: March 1, 2020

Abstract

Using a sample of Chinese stocks, we demonstrate that liquidity and price movements in stocks with investor leverage can spill out to other stocks within a day causing the intraday lead-lag relations in stock markets. In addition, we provide evidence suggesting that leverage in both long positions (i.e., margin interest) and short positions (i.e., short interest) contribute to the degree of leverage stocks’ leading effects. Finally, we employ mediation models to gauge the mechanisms through which the lead-lag relations may appear. We find that both the deleverage process of the leveraged traders and the cross-asset learning behavior of the investors are important explanations for the relation between leverage in long position and relevant stocks’ leading effects. But the cross-asset mechanism does not explain why leverage in short position causes the leading effects in these stocks.

Keywords: Margin trading, short selling, lead-lag effects, deleverage, cross-asset learning, Chinese stock markets

Suggested Citation

Ye, Qing and Zhou, Shengjie, The impact of Investor Leverage on Stock Market Spillover Effects:Evidence from a Natural Experiment (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3667743 or http://dx.doi.org/10.2139/ssrn.3667743

Qing Ye

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

Shengjie Zhou (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

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