Margin buying activity and stock market trading in China: Is there a connection?

Abstract

This paper examines the dynamic linkage between margin buying activity and stock market trading in China. Built upon a multivariate DCC-GJRGARCH model and the spillover index method, the results highlight a high dynamic conditional correlation between margin buying activity and stock market trading which shows apparent time-varying features. Furthermore, there is a two-way risk-spillover relationship, with stock market trading playing a dominant role in risk transmission. More importantly, the level of risk contagion actually varies over time due to certain large external shocks. Margin buying activity tends to be a mean risk-spillover receiver most time, whereas it acts as both a volatility risk-spillover transmitter and a receiver over the entire sample period. The analysis thus implies that margin buying activity does have a close interrelationship with stock market trading in China, which has important implications for both regulators and investors.