Margin Trading and Securities Lending, Investor Sentiments and the Volatility of Chinese Securities Market

Abstract

Whether margin trading and securities lending transaction help to stabilize the stock market or amplify stock market volatility is a topic that has long been a concern. Based on the perspective of volatility asymmetry, we use event analysis and ARMA-EGARCH-M model to empirically test whether China’s margin trading and securities lending transactions can boost the bull market and aggravate the price decline in bear market. The empirical results show that the volatility of China’s stock market was asymmetric. Margin trading transactions reduced the stock market volatility while securities lending transactions increased the stock market volatility. Since the trading volume of margin trading was much larger than the trading volume of securities lending, the stock market volatility decreased since the launch of margin trading and securities lending mechanism.