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Short-selling, margin-trading, and stock liquidity: Evidence from the Chinese stock markets

Qing Ye, Shengjie Zhou and Jie Zhang

International Review of Financial Analysis, 2020, vol. 71, issue C

Abstract: This paper examines the impacts of two forms of leveraged trading—margin trading and short selling—on the trading liquidity of individual stocks in China. We find that trading liquidity for relevant stocks generally improves after restrictions on leveraged trading are removed. However, margin trading and short selling have opposite impacts on liquidity. During ordinary periods, margin trading benefits liquidity, whereas short selling damages liquidity; however, during market downturns, their roles are reversed. We also provide evidence suggesting that short sellers are informed traders in China and that short selling reduces stock liquidity because of the increased risk of adverse selection faced by uninformed traders.

Keywords: Margin trading; Short selling; Stock liquidity; Chinese stock markets (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:71:y:2020:i:c:s1057521920301939

DOI: 10.1016/j.irfa.2020.101549

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