MARGIN-TRADING ACTIVITIES AND FUTURE STOCK RETURNS: NEW EVIDENCE FROM NONLINEAR ANALYSIS

Using multifractal detrended cross-correlation analysis (MF-DCCA) and nonlinear Granger causality test, this paper examines the return predictability of margin-trading activities. Results show that the predictive power of margin-trading activities on subsequent stock returns varies with respect to the different aspects of margin trading. In line with previous studies, we find no significant correlation between margin-buying amount and subsequent stock returns. However, the margin-covering amount is negatively associated with subsequent stock returns; and margin debt is positively associated with the future stock returns. In general, our findings suggest that margin traders may have no positive information when they conduct a margin-buying position, but may possess negative information when covering their positions.