Buying on Margin and Short Selling in an Artificial Double Auction Market

Xuan Zhou and Honggang Li ()
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Xuan Zhou: Beijing Normal University
Honggang Li: Beijing Normal University

Computational Economics, 2019, vol. 54, issue 4, No 11, 1473-1489

Abstract: Abstract Leverage trading, which consists of short selling and buying on margin, has been introduced into stock markets in many countries, including China. Ever since, there have been heated debates on how leverage trading influences financial markets. In this paper, an agent-based artificial market model is developed to simulate market behaviors and to analyze the influence of the leverage ratio on liquidity, volatility and price-discovery efficiency. In our artificial market, heterogeneous agents submit limit orders based on the fundamentalist or chartist strategy, and their effective supplies and demands can be increased by short selling or margin trading. Numerical analyses are performed in both one-sided and two-sided markets. We find that in one-sided markets, leverage trading can increase market liquidity and volatility, and decrease price-discovery efficiency. However, in the two-sided market, the increase of liquidity is much smaller, the volatility is decreased, and the price-discovery efficiency is improved. Generally, this model provides some meaningful results, which are supported by many other studies, and these findings underscore the necessity of building up a two-sided market when introducing leverage trading into stock markets.

Keywords: Agent-based model; Continuous double auction; Short selling; Margin trading (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10614-017-9722-4

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