Summary:
Since the introduction of the margin trading system in the Chinese A-share market in 2010, the trading volumes and holding balances of margin investors have increased significantly. Today, margin investors hold approximately 1 trillion yuan of A-share stocks, and these investors are thus a key part of the market. There is therefore a need for a better understanding of the trading behavior of margin investors and its effect on the pricing mechanisms of the A-share market. To this end, we exploit the unique data availability of the Chinese A-share market to conduct in-depth analyses of the trading of margin investors to determine how their trading affects market returns and liquidity. We refer to the predictions of collateral constraint models and hypothesize that margin investors are trend-followers; thus, there should be asymmetry in the relationship between stock price changes and leveraged investors' trading behavior. We observe a significant trend-following pattern in the behavior of margin investors in Chinese stock markets: these investors buy after a stock price increases and sell after a stock price decreases. We find that a stock price decrease has a greater effect on margin investors' trading activity than a similar stock price increase. We further show that this asymmetry is mainly driven by market-level returns. Specifically, we conduct stock-level time-series regressions in which the weekly net buying activity based on margins is regressed on the lagged weekly stock returns. We find that a significantly positive relationship exists between leveraged net buying activity and past stock returns: if the stock price increases in week t-1, there is a significant increase in the net buying activity by leveraged investors in week t; analogously, if the stock price decreases in week t-1, there is a significant increase in the net selling activity by leveraged investors in week t. We quantify the magnitude of this effect based on the average size of our sample firm (approximately 25 billion RMB) and thus calculate that a 10% stock price change in a given week will lead to a 0.25% (or 44 million RMB) change in the total market cap trading by leveraged investors in the following week. Next, we test whether there is any difference between the effects of stock price increases and decreases on leveraged investors' trading behavior. Brunnermeier and Pedersen (2009) suggest that a loss spiral may occur in some price-decrease circumstances, where an initial price decrease caused by an exogenous shock can lead to leveraged speculators experiencing losses on their existing positions, causing them to de-leverage by selling, which causes further price decreases, and thus continued selling. In addition, when a market increases in value and leveraged investors can borrow more, they are free to choose whether to make additional stock purchases, but when a market decreases in value and leveraged investors are affected by funding or collateral constraints, they are compelled to sell their portfolio holdings, especially if they receive margin calls. Therefore, we hypothesize that the effect of stock price decreases on leveraged investors' trading behavior is stronger than the effect of stock price increases on their trading behavior. We find that there is indeed significant asymmetry in the relationship between stock price changes and leveraged investors' trading behavior: specifically, the effect of a stock price decrease on leveraged trading activity is approximately twice the effect of a stock price increase of the same magnitude on leveraged trading activity. This means that a 10% price increase of an average stock in a given week will lead to net buying of approximately 0.13% of the market cap by leveraged investors in the following week, whereas a price decrease of 10% will lead to net selling of 0.24% of the market cap by leveraged investors in the following week. Notably, these differences are statistically significant, and thus provide direct support for the predictions of the Brunnermeier and Pedersen (2009) collateral constraint model. Furthermore, we find that the asymmetric relationship between stock price changes and leveraged trading behavior strengthens in good economic times, which is consistent with the theoretical predictions of Acharya and Viswanathan (2011). We also explore the return predictability of leveraged trading activity. We observe that a significantly negative relationship exists between net leveraged buying activity and subsequent stock returns. In addition, we find that the negative relationship between leveraged investors' trading activity and their subsequent weekly stock returns is primarily attributable to the selling behavior of margin investors. Overall, our paper provides strong empirical support for collateral constraint models. We also provide policy recommendations on how the resilience of Chinese stock markets could be improved.
康文津, 顾明. 杠杆投资者融资交易行为模式研究—— 来自A股市场的经验证据[J]. 金融研究, 2021, 493(7): 154-171.
KANG Wenjing, GU Ming. The Trading Behavior of Margin-Leveraged Investors: Evidence from Chinese Stock Markets. Journal of Financial Research, 2021, 493(7): 154-171.
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