De-Leverage and Illiquidity Contagion

46 Pages Posted: 11 Jul 2016 Last revised: 10 Mar 2019

See all articles by Conghui Hu

Conghui Hu

Beijing Normal University, Business School

Yu-Jane Liu

Peking University - Guanghua School of Management

Ning Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Tsinghua University - PBC School of Finance

Date Written: June 1, 2016

Abstract

This paper investigates how variations in stock-level leverage lead to dynamic intraday trading behavior and illiquidity transmission across different stocks by utilizing a unique, precise, stock-level margin trading dataset. We document that leveraged investors’ need to meet margin call requirements and liquidity demands due to prior market drop results in subsequent selloffs in otherwise stable stocks. This effect exists both within and across different industries and is stronger for stocks with less information asymmetry, better liquidity, higher past stock performance, and even during trading suspension. We also find strong evidence on the volatility spillover induced by leverage. Taken together, such findings suggest that our results are driven by illiquidity contagion instead of information spillover. Our study contributes to the research on asset fire sales, margin trading, and funding liquidity during the intraday deleveraging process in financial market turmoil.

Keywords: Leverage, Illiquidity spillover, Market crash, Intraday, China

JEL Classification: G12, G14

Suggested Citation

Hu, Conghui and Liu, Yu-Jane and Zhu, Ning, De-Leverage and Illiquidity Contagion (June 1, 2016). Journal of Banking and Finance, Vol. 102, 2019, Available at SSRN: https://ssrn.com/abstract=2807277 or http://dx.doi.org/10.2139/ssrn.2807277

Conghui Hu

Beijing Normal University, Business School ( email )

19 Xinjiekou Outer St
Haidian District
Beijing, Beijing 100875
China

Yu-Jane Liu

Peking University - Guanghua School of Management ( email )

Beijing
China

Ning Zhu (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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