University of International Business and Economics
Institutional Affiliation: University of International Business and Economics
NBER Working Papers and Publications
|September 2018||Leverage-Induced Fire Sales and Stock Market Crashes|
with Zhiguo He, Kelly Shue, Hao Zhou: w25040
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.