Margin trading in which investors purchase shares with money borrowed from brokers is blamed to be a major cause of the 2015 Chinese stock market crash. We propose a cascading failure model and examine how an increase in margin trading increases share price vulnerability. The model is based on a bipartite graph of investors and shares that includes four margin trading factors, (i) initial margin k, (ii) minimum maintenance r, (iii) volatility v, and (iv) diversity s. We use our model to simulate margin trading and observe how the share prices are affected by these four factors. The experimental results indicate that a stock market can be either vulnerable or stable. A stock market is vulnerable when an external shock can cause a cascading failure of its share prices. It is stable when its share prices are resilient to external shocks. Furthermore, we investigate how the cascading failure of share price is affected by these four factors, and find that by increasing v and r or decreasing k we increase the probability that the stock market will experience a phase transition from stable to vulnerable. It is also found that increasing s decreases resilience and increases systematic risk. These findings could be useful to regulators supervising margin trading activities.
Purpose – The purpose of this paper is to investigate the intraday effect of nature disaster (external inevitable factor) and production safety accident (PSA) (internal factor regarding management level) announcement on stock price in China’s stock markets. Design/methodology/approach – Using high-frequency data, this study adopts event study method to examine the intraday abnormal returns as well as the volatility of stock price before and after the announcement of nature disaster and PSA. Findings – First, both nature disaster announcement and PSA announcement produce negative effects on stock returns. However, there are some differences in effects between the different types of announcement. Second, it is just within the event day (announcement day if trading day, otherwise the first trading day after announcement) that the volatility of stock price is distinctly increased by the two kinds of announcement. Third, there are some differences in the impacts of nature disaster announcement on firms in different industries. Finally, there are also some differences observed between the impacts of PSA announcement on chemical firms and other firms. Originality/value – It is the first time that using high-frequency data to analyze the intraday impact of nature disaster and PSA announcement on stock short price behavior. The results can help us to understand the role of market microstructure playing in the process of stock price formation, especially the stock price movements before and after disaster and accident announcement and the sensitivity to the announcement. The empirical results have important implications for investors when making trading decisions, and for market regulators when setting trading rules.
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