Research / BFI Working PaperMar 01, 2019

Leverage-Induced Fire Sales and Stock Market Crashes

Jiangze Bian, Zhiguo He, Kelly Shue, Hao Zhou

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 mar-gin accounts, facilitated by FinTech lending platforms, contributed more to the crash despite their smaller asset holdings relative to regulated brokerage accounts.

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