Leverage-Induced Fire Sales and Stock Market Crashes

Jiangze Bian, Zhiguo He (), Kelly Shue and Hao Zhou

No 25040, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide direct evidence of leverage-induced fire sales contributing to a market crash using account-level trading data for brokerage- and shadow-financed margin accounts during the Chinese stock market crash of 2015. Margin investors heavily sell their holdings when their account-level leverage edges toward their maximum leverage limits, controlling for stock-date and account fixed effects. Stocks that are disproportionately held by accounts close to leverage limits experience high selling pressure and abnormal price declines which subsequently reverse. Unregulated shadow-financed margin accounts, facilitated by FinTech lending platforms, contributed more to the crash despite their smaller asset holdings relative to regulated brokerage accounts.

JEL-codes: G01 G11 G18 G23 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-fmk and nep-tra
Note: AP CF
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Citations: View citations in EconPapers (30)

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