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Buying on Margin and Short Selling in an Artificial Double Auction Market

  • Xuan Zhou
  • Honggang Li
Article

Abstract

Leverage trading, which consists of short selling and buying on margin, has been introduced into stock markets in many countries, including China. Ever since, there have been heated debates on how leverage trading influences financial markets. In this paper, an agent-based artificial market model is developed to simulate market behaviors and to analyze the influence of the leverage ratio on liquidity, volatility and price-discovery efficiency. In our artificial market, heterogeneous agents submit limit orders based on the fundamentalist or chartist strategy, and their effective supplies and demands can be increased by short selling or margin trading. Numerical analyses are performed in both one-sided and two-sided markets. We find that in one-sided markets, leverage trading can increase market liquidity and volatility, and decrease price-discovery efficiency. However, in the two-sided market, the increase of liquidity is much smaller, the volatility is decreased, and the price-discovery efficiency is improved. Generally, this model provides some meaningful results, which are supported by many other studies, and these findings underscore the necessity of building up a two-sided market when introducing leverage trading into stock markets.

Keywords

Agent-based model Continuous double auction Short selling Margin trading 

Notes

Acknowledgements

We thank Xuezhong He for useful comments and discussions, and anonymous referees for helpful comments. None of the above is responsible for any of the errors in this paper. This work was supported by the National Natural Science Foundation of China under Grant No. 71671017 and the Fundamental Research Funds for the Central Universities.

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Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  1. 1.School of Systems ScienceBeijing Normal UniversityBeijingPeople’s Republic of China

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