VGSF - WU Vienna - LC

Zhi Da, University of Notre Dame

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Zhi Da from the Uni­versity of No­tre Dame to present his re­search pa­per.
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Pa­per

Lever­age Net­works and Mar­ket Con­ta­gion

Us­ing daily ac­coun­t-­level data that track hun­dreds of thou­sands of mar­gin in­vestors’ lever­age ra­tios and trad­ing activ­it­ies, we ex­am­ine the ef­fect of mar­gin-in­duced trad­ing on stock re­turn dy­nam­ics dur­ing the re­cent mar­ket tur­moil in Ch­ina. We start by provid­ing dir­ect evid­ence of de­lever­ging-in­duced sales—the tend­ency to scale down levered pos­i­tions after ex­per­i­en­cing neg­at­ive port­fo­lio re­turns. Ag­greg­at­ing this be­ha­veior across all mar­gin in­vestors, we doc­u­ment a strong re­turn spillover ef­fect—a stock’s re­turn can be fore­cas­ted by a port­fo­lio of stocks with which it shares com­mon mar­gin-in­vestor own­er­ship. This re­turn pat­tern is sub­sequently re­versed, and is present only in mar­ket down­turns. Fur­ther, de­lever­aging-in­duced selling can ex­plain a large por­tion of the well-­known asym­metry in stock re­turn co­move­ment between mar­ket booms and busts. Fi­nally, ex­ploit­ing three bail­out waves car­ried out by the Chinese gov­ern­ment, we provide ad­di­tional evid­ence for a) the shock trans­mis­sion role of the lever­age net­work, and b) the sys­tem­atic im­port­ance of stocks that are cent­ral in the net­work.

Keywords: mar­gin trad­ing, lever­age, con­ta­gion, net­work cent­ral­ity



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