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Leverage-induced fire sales and stock market crashes

Author: Jiangze Bian; Zhiguo He; Kelly Shue; Hao Zhou; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2018.
Series: Working paper series (National Bureau of Economic Research), no. 25040.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
We provide direct evidence of leverage-induced fire sales contributing to a market crash using account-level trading data for brokerage- and shadow-financed margin accounts during the Chinese stock market crash of 2015. Margin investors heavily sell their holdings when their account-level leverage edges toward their maximum leverage limits, controlling for stock-date and account fixed effects. Stocks that are  Read more...
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Details

Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Jiangze Bian; Zhiguo He; Kelly Shue; Hao Zhou; National Bureau of Economic Research,
OCLC Number: 1054828172
Notes: "September 2018"
Description: 1 online resource (70 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 25040.
Responsibility: Jiangze Bian, Zhiguo He, Kelly Shue, Hao Zhou.

Abstract:

We provide direct evidence of leverage-induced fire sales contributing to a market crash using account-level trading data for brokerage- and shadow-financed margin accounts during the Chinese stock market crash of 2015. Margin investors heavily sell their holdings when their account-level leverage edges toward their maximum leverage limits, controlling for stock-date and account fixed effects. Stocks that are disproportionately held by accounts close to leverage limits experience high selling pressure and abnormal price declines which subsequently reverse. Unregulated shadow-financed margin accounts, facilitated by FinTech lending platforms, contributed more to the crash despite their smaller asset holdings relative to regulated brokerage accounts.

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