Research On the Impact of Margin Trading on The Stock Idiosyncratic Volatility

Abstract

In classical asset pricing model, expected stock return is only determined by systematic risk, and idiosyncratic risk can be completely dispersed without asset pricing effect. However, the real world and the assumptions of classical asset pricing model are different, as idiosyncratic risk cannot be completely dispersed and has pricing effect. Recent studies found that the stock idiosyncratic volatility can actually predict stock return negatively, indicating the existence of the " Idiosyncratic volatility puzzle" in the Chinese stock market. There are constraints on margin trading in the Chinese stock market, which can affect investors' investment behavior and expectation of stock return. This article adopts difference-in-differences model and multivariable linear regression mode to test the impact of margin trading on idiosyncratic volatility, and further investigate the impact of margin trading on the " Idiosyncratic volatility puzzle ". The research results found that: In the process from the establishment of the margin trading system to the gradual expansion of underlying stocks, the impact of margin trading on idiosyncratic volatility has shifted from a positive impact to a negative impact. That is to say, margin trading has transitioned from initially increasing idiosyncratic volatility to later reducing idiosyncratic volatility, gradually playing a role in price discovery and reducing idiosyncratic risk in the stock market. The gradual improvement of the margin trading system is driving the development and maturity of the Chinese stock market.