Working Paper: NBER ID: w25040
Authors: 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.
Keywords: leverage; fire sales; stock market crash; margin trading; shadow financing
JEL Codes: G01; G11; G18; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| margin accounts approaching leverage limits (E44) | net selling intensifies (G10) |
| distance to margin call (DMC) (E41) | selling intensity (G24) |
| DMC < 3 (Y70) | increased net selling (G19) |
| market down days (G14) | stronger relationship between DMC and net selling (L14) |
| regulatory announcements tightening leverage constraints (G18) | spikes in selling intensity for shadow margin accounts (E44) |
| leverage-induced fire sales (G33) | market crash (G01) |
| shadow-financed accounts (G23) | more aggressive selling compared to brokerage accounts (G24) |