Margin Trading and Leverage Management

74 Pages Posted: 11 Mar 2021

See all articles by Jiangze Bian

Jiangze Bian

University of International Business and Economics (UIBE)

Zhi Da

University of Notre Dame - Mendoza College of Business

Zhiguo He

University of Chicago - Finance

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Kelly Shue

Yale School of Management; National Bureau of Economic Research (NBER)

Hao Zhou

SUSTech Business School; Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 10, 2021

Abstract

We use granular data covering regulated (brokerage-financed) and unregulated (shadow-financed) margin trading during the 2015 market turmoil in China to provide the first systematic analysis of margin investors’ characteristics, leverage management policies, and liquidation choices. We show that leverage constraints induced substantial forced and preemptive sales, and leverage and cash management differed substantially across investor and account types. We explore the relation between margin trading and shock propagation, and show that China’s price limit rule led to unintended contagion across stocks. Compared to brokerage investors, shadow investors were closer to their leverage constraints, and played a more significant role in transmitting shocks across stocks.

Keywords: margin trading, leverage management, liquidation policy, contagion

Suggested Citation

Bian, Jiangze and Da, Zhi and He, Zhiguo and Lou, Dong and Shue, Kelly and Zhou, Hao, Margin Trading and Leverage Management (March 10, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-29, Available at SSRN: https://ssrn.com/abstract=3801873 or http://dx.doi.org/10.2139/ssrn.3801873

Jiangze Bian

University of International Business and Economics (UIBE) ( email )

10, East Huixin Street, Chaoyang District
Beijing, 100029
China

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Zhiguo He (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.zhiguohe.com

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Kelly Shue

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hao Zhou

SUSTech Business School ( email )

1088 Xueyuan Avenue, Nanshan District
Southern University of Science and Technology
Shenzhen, Guangdong
China
+86-0755-88010464 (Phone)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
+86-10-62790655 (Phone)

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