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

53 Pages Posted: 18 Sep 2020 Last revised: 13 Jan 2021

See all articles by Qing Ye

Qing Ye

Xi'an Jiaotong-Liverpool University (XJTLU)

Shengjie Zhou

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 positions in leveraged stocks contribute to the degree of their leading effects. In particular, margin interest is positively associated with the leading effects in both return and liquidity and short interest is positively associated with the leading effect in return. Finally, we employ the mediation models to gauge the mechanisms through which the lead-lag relation may appear. We find that both the deleverage process of the leveraged traders and the cross-asset learning behavior of the investors are important driving forces for the leading effect of the leveraged stocks. Evidence in this paper helps us to understand how and why liquidity and return commonality across stocks are formed.

Keywords: stock liquidity, lead lag, leverage

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)

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

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

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