Can Margin Trading Reduce the Volatility of China’s Stock Market?

Abstract

We use the GARCH group models to test whether margin trading can reduce the volatility of Chinese stock market,in both vertical and horizontal angles.The vertical analysis of GARCH model shows that,statistically speaking,the volatility of Chinese stock market significantly is reduced after margin trading has kicked in.Horizontal comparison reveals that compared to the Shanghai Composite Index,the SSE 50 Index,which contains a higher proportion of underlying stock,performs better in terms of reducing the volatility of the stock market with margin trading.Finally,based on results of our analysis,we suggest that credit should be conferred in a decentralized manner,that development and growth in financing and securities lending should proceed in a balanced fashion,and that a correct understanding of return matching risk should be cultivated among investors.