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Margin trading and stock idiosyncratic volatility: Evidence from the Chinese stock market

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  • Gui, Pingshu
  • Zhu, Yifeng

Abstract

In this paper, we find that the idiosyncratic volatility (IV) effect on expected returns exists and cannot be explained by other variables in the Chinese stock market. The Chinese stock market launched margin trading in March 2010. We therefore study the margin trading target and non-margin trading target stocks separately and find that the IV effect exists in both stock groups. The IV effect of the margin trading target stocks can be explained by the turnover ratio, whose mechanism shows that the short sale constraint hinders the expression of the seller’s heterogeneous beliefs. However, the IV effect of the non-margin trading target stocks cannot be interpreted by other variables. In comparison to margin trading target stocks, non-margin trading target stocks are more likely to have the lottery characteristics and their gambling behavior is more pronounced.

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  • Gui, Pingshu & Zhu, Yifeng, 2021. "Margin trading and stock idiosyncratic volatility: Evidence from the Chinese stock market," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 484-496.
    • Handle: RePEc:eee:reveco:v:71:y:2021:i:c:p:484-496
    DOI: 10.1016/j.iref.2020.08.021
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    2. Chen, Haozhi & Zhang, Yue, 2023. "Research on the effect of firm-specific investor sentiment on the idiosyncratic volatility anomaly: Evidence from the Chinese market," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).
    3. Bi, Jia & Gui, Pingshu & Zhu, Yifeng, 2022. "Large transactions and the MAX effect: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    4. Liu, Jia & Fu, Pengju & Lin, Chunyan, 2023. "Rule improvements and irrational characteristics of herd behaviour–The effects of SMT policy," Finance Research Letters, Elsevier, vol. 56(C).
    5. Hong, Jiawei & Yu, Xiaojian & Xiao, Weilin & Zhang, Xili, 2022. "The dispersion of beta estimates and the investors’ heterogeneous Beliefs：Evidence from the stock market in China," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 540-550.

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