The Asymmetry between Margin Trading and Short Selling and Its Relationship with Stock Price Crash: Evidence from the Perspectives of Risk Hedging

Abstract

Abstract: Finding out how to adjust the trading policy of margin trading and short selling to avoid stock price crash is essential in guarding against systematic financial risks and putting deleveraging policies into practice. In this paper we investigate the asymmetry between margin trading and short selling, a unique phenonemon in China, and analyze the mechanism of how it relates to stock price crash. We find that the asymmetry impedes the risk hedging between margin trading and short selling, resulting in a larger risk of stock price crash. Further evidence from mediating tests suggests that the asymmetry makes it hard to hedge information risk and liquidity risk, thus more likely to trigger stock price crash. Our study implies that improving the trading policies regarding margin trading and short selling is important for preventing financial risks and ensuring the healthy development of capital markets.

Key words: the asymmetry between margin trading and short selling, crash risk, information risk, liquidity risk, risk hedging

Zhong Kai, Li Xinyu, Wang Huacheng. The Asymmetry between Margin Trading and Short Selling and Its Relationship with Stock Price Crash: Evidence from the Perspectives of Risk Hedging[J]. Management Review, 2022, 34(5): 13-24.

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