The Threshold Effect of Leveraged Trading on the Stock Price Crash Risk: Evidence from China

Abstract

The stock price crash constitutes one part of the complexity in the stock market. We aim to verify the threshold effect of leveraged trading on the stock price crash risk from the perspective of feedback trading. We empirically demonstrate that leveraged trading has a threshold effect on the stock price crash risk on the basis of monthly data on leveraged trading in the Chinese stock market from January 2014 to December 2016. At a low leverage ratio, leveraged trading reduces the stock price crash risk; however, as the leverage ratio increases and exceeds a certain threshold, leveraged trading asymmetrically increases the stock price crash risk. These findings provide new insights in understanding the complexity in the Chinese stock market.

Keywords

• leveraged trading
• stock price crash risk
• threshold effect
• complexity in stock market