Margin Trading and Stock Idiosyncratic Volatility: Evidence from the Chinese Stock Market

We find that the idiosyncratic volatility (IV) effect is quite significant exist and cannot be explained by other variables in the Chinese stock market. The Chinese stock market launched margin trading in March 2010. In this paper, we study both the margin trading target stocks and non-margin trading target stocks and find that the IV effect exists in both stock groups. The IV effect of the margin trading target stocks can be explained by the turnover ratio, whose mechanism is that the short sale constraints hinder the expression of the seller’s heterogeneous beliefs. However, the IV effect of the non-margin trading target stocks cannot be interpreted by other variables. In comparison to margin trading target stocks, non-margin trading target stocks are more likely to have the characteristics of lottery-type stocks and their gambling behavior is more pronounced.