VGSF Finance Research Seminar

Wirtschaftsuniversität Wien, Departments 3 3.0.22511:00 - 12:30

Art Vortrag/Diskussion
Vortragende/rZhi Da (University of Notre Dame)
Veranstalter Wirtschaftsuniversität Wien Leverage Networks and Market Contagion
Kontakt office@vgsf.ac.at

The FRS informs about state-of-t­he-art rese­arch in Finance.

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 beha­vior 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.

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