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Deleveraging commonality

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  • Hu, Conghui
  • Liu, Yu-Jane
  • Zhu, Ning

Abstract

We empirically show that stock-level margin trading commoves significantly with market-aggregate margin trading even after controlling for market return and market-wide liquidity. The commonality during the deleveraging process is more pronounced than when leverage increases, and deleveraging commonality contributes to the decline in stock liquidity and heightened surges in liquidity commonality. We also find that market-aggregate margin trading exerts a much larger impact on selling and investors’ order submission strategies than its stock-level counterpart during market crashes. Overall, recognizing the existence of commonality offers a simple and alternative way to think about the systematic risk associated with leverage trading.

Suggested Citation

  • Hu, Conghui & Liu, Yu-Jane & Zhu, Ning, 2021. "Deleveraging commonality," Journal of Financial Markets, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finmar:v:53:y:2021:i:c:s1386418120300513
    DOI: 10.1016/j.finmar.2020.100582
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    References listed on IDEAS

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    More about this item

    Keywords

    Deleveraging commonality; Leverage; Liquidity; Market resiliency;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G4 - Financial Economics - - Behavioral Finance

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