Margin Trading

&
Stock Volatility in SSE
Group 96

Advisor: Dr. Wan Kam MING

SUN Xueyang Yolanda
ZHU Xiaofan Lavender

Margin Trading
I want to purchase
$2000 stocks, but I
only have $1200.

Short selling - sell securities

borrowed from a trader &
subsequently repurchase at a
lower cost

Dont worry, I can borrow

you the remaining cash, but
you should use securities
as collateral.

1. Background of Study

CONCENTS

2. Literature review
3. Hypothesis
4. Methodology
5. Findings
6. Analysis & Interpretation
7. Conclusions
8. Limitations

01

Background of Study

Background of Study

02
St 180
oc
ks

St 50
oc
ks
01

12/5/2011

1/31/2013

9/22/2014

St 300
oc
ks

St 500
oc
ks

03

04

St 400
oc
ks

3/31/2010

9/6/2013

The dollar amount of short selling seldom

exceeds 1% of margin trading

05

02

Literature Review

Literature Review
Empirical studies: the U.S. or ;
Korea and Taiwan
; Hong Kong
Decreased

No influence

Increased

Margin
trading helps
to reveal
fundamental
prices of stocks

Assumption:
all the
investors are
rational

Signal effect of
margin
trading
aggravates
financial crisis

03

Hypothesis

Hypothesis 1
When the stocks are first allowed to margin trading:
The volatilities of the stocks allowed to margin trading
are smaller than those of the stocks not allowed to

Integrate more
information in
stock price

Improve
discovery of
stock
fundamental
price
Improve Market
efficiency

Increase
investment
amount and
stock number

Increase stock
liquidity

Hypothesis 2
During the stock market turbulence:
The volatilities of the stocks allowed to margin trading
are larger than those of the stocks not allowed to

Individual
investors not
experienced
enough

As a new
regulation,
margin trading is
under
development

04

Methodology

Control Group vs. Experimental Group

Control Group

Experimental
Group

Group Size

90 stocks in each group

Data Source

Bloomberg

Beta

Similar Beta

Industry

Same Industry

Margin Trading

NO

YES

VIX DID
Volatility Difference in Difference
Model (VIX DID)
Volatility: a measure of the risk
of price moves for a stock
-5
calculated from the standard
deviation of day-to-day
logarithmic historical price
changes
5-day price daily volatility

-4

-3

-2

-1
V-1

4
V1

VIX DID
-5

-4

-3

-2

-1

V-1

Market returns
Calculate daily logarithmic returns

Stock Price
Collect 5-day stock price

V1

Annualized
Standard Deviation

Standard deviation
Calculate standard deviation
of five days

H1 Event Window
No. of volatility
Pre
Post

15

30

45

V-1

(v-1++v-15)/15 (v-1+.+v-30)/30

(v-1+.+v-45)/45

V1

(v1+.+v15)/15

(v1+.+v45)/45

(v1+.+v30)/30

45 day VIX
30 day VIX
15 day VIX
1 day VIX
1

15

30

45

H2 Event Window
No. of volatility

48

Pre

V-1

(v-1+.+v-48)/48

Post

V1

(v1+.+v48)/48
48 day VIX (Jun. 12-Aug. 26, 2015)

1 day VIX

48

VIX DID
DID = (Exppost - Exppre) - (Ctrlpost - Ctrlpre)

H1: DID<0

T-test
H2: DID>0

Example
Step 1 Select sample stocks

Control group:
stock 600117

Experimental group:
stock 600005

Example
Step 2

Calculate average VIX before and after implementation

date March 31, 2010 (H1)
Control Group (600117)

1-day VIX
15-day-average
VIX
30-day- average
VIX
45-day- average
VIX

Experimental Group (600005)

PreC1

PostC1

PreE1

PostE1

35.62

26.79

21.38

8.59

39.58

39.72

19.54

25.97

36.70

47.95

22.18

31.67

32.76

49.98

24.52

31.48
Data source: Bloomberg

Example
Step 2 Calculate average VIX before and after June 12,2015 (H2)

Control Group (600117)

Experimental Group
(600005)

PreC2

PostC2

PreE2

PostE2

1-day VIX

35.07

133.95

29.83

85.67

48-dayaverage VIX

71.00

85.95

58.88

95.65
Data source: Bloomberg

Example
Step 3 Calculate the volatility change for H1
DID
1 day VIX
15-day-average VIX
30-day-average VIX
45-day-average VIX

H1 is correct when
using 1 day, 30 days,
and 45 days average
VIX

-3.95
6.29
-1.76
-10.27
H1 is correct
when using 1 day, 30 days,
and 45 days average VIX

Example
Step 3 Calculate the volatility change for H2
DID
1 day VIX

-43.41

48-day-average VIX

19.59

H2 is correct
when using 48 days average
VIX

Regression Test
Other factors: Market cap. & trade volume
Dependent variable: VIX DID

DID =A + B ln (Market cap.)

DID =C + D ln (Trade volume)

Test P-value

H1: DID of 30-day-average

VIX
H2: DID of 48-day-average
VIX

05

Findings

Findings -- Hypothesis 1
The results of DID
at the time of implementing margin trading
1-Day-VIX

15-Day VIX 35-Day VIX 50-Day VIX

Mean

1.77

1.16

0.81

0.28

STDEV

29.97

17.02

16.34

12.49

T-value

0.5251

0.6360

0.4704

0.2092

When implementation, margin trading has little influence

on volatility
Contradict with H1

Findings -- Hypothesis 2
The results of DID
During market turbulence in June 2015
1-Day-VIX

48-Day VIX

Mean

0.37

2.24

STDEV

47.90

16.02

T-value

0.0685

1.3257

During market turbulence, margin trading increases the

volatility
Consistent with H2

Findings Regression Test

DID of H1
&
Market
cap.

DID of H1
&
Trading volume

DID of H2
DID of H2
&
&
Market
Trading volume
cap.

Coefficient
5.54
P-value
0.0069

Coefficient
3.17
P-value
0.23

Coefficient
-0.33
P-value
0.87

Coefficient
1.92
P-value
0.36

Impact on
result of H1

Little impact

Little impact

Little impact

06

Analysis & Interpretation

Analysis Hypothesis 1
Margin tradings
transaction volume
takes very small
proportion of total
transaction volume

Mean of the
ratio = 0.234%
Small proportion

Test ratio from 31 Mar. 2010 to 31 Dec. 2015

Analysis Hypothesis 2
Low risk aversion

Buy stocks by
margin trading

Sell stocks &

Drive price lower

Ask for
collateral

07

Limitations

Limitations
The number of selected
stocks may not be enough
(90/500)

Control group may not

precisely represent the
average performance of
stocks without margin
trading

Influence of margin
trading may change if the
volume of margin trading
transactions increases in
the future

Market capitalization
may influence result
accuracy

08

Conclusions

Conclusion
Provide
complementary
study

H1 not hold
H2 is proven
Emphasize
importance to
educate
investors

Provide
rationale for
restricting the
threshold of
margin
trading

Suggest
CSRC should have
more developed
regulation

References
Angel, J. J. (1997). Short selling on the NYSE. Unpublished manuscript, Georgetown University.
Bloomberg. (2016) Bloomberg Professional. [Online]. Available at: Pao Yue-kong Library, (Accessed: February 2016).
Caginalp, G., Porter, D., & Smith, V. L. (2000). Overreaction, momentum, liquidity, and price bubbles in laboratory and field
asset markets. Journal of Psychology and Financial Markets, (1), 24-48.
Chen, H. Q., & Fan, Y. F. (2015).The impact of margin trading and short selling system on the volatility of China's stock
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Garbade, K. D. (1982). Federal reserve margin requirements: A regulatory initiative to inhibit speculative bubbles. Crises in
the Economic and Financial Structure, Lexington, MA: Lexington Books.
Hardouvelis, G. A. (1990). Margin requirements, volatility, and the transitory component of stock prices. The American
economic review, 736-762.
Lee, S. B., & Yoo, T. Y. (1993). Margin regulation and stock market volatility: further evidence from Japan, Korea and
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Liao, S. G., & Yang, Z. J. (2005). The effect of short selling mechanism on stock price -- Empirical Evidence from Taiwan
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Morck, R., B. Yeung, and W. Yu, 2000, The information content of stock markets: why do emerging markets have
synchronous stock price movements?, Journal of Financial Economics 58, 215260.
Sharif, S., Anderson, H. D., & Marshall, B. R. (2014). Against the tide: The commencement of short selling and margin
trading in mainland China. Accounting & Finance, 54(4), 1319-1355.
Shanghai Stock Exchange (2016). Retrieved February 18, 2016 from http://www.sse.com.cn/.

THANK YOU