Although margin trading has significant impacts on the stock market, extant research has mainly focused on its effect on stock price volatility and has rarely examined its influence on the rate of returns. In addition, little systematic research has examined the differential effects of margin trading under different circumstances. This thesis examines the effects of margin trading in bull market, bear market, balanced market and among stocks included in main board, SMEs(small and medium-sized enterprises) board, GEM(growth enterprises board), as well as large-cap and small-cap in China. I further studied the long-, medium-, and short-term influences of margin trading on the volatility of stock price, return rate, and liquidity of the market by both using the SVAR model and conducting panel data analyses.

The findings show that: a)Volatility. Margin trading can effectively curtail the medium- and short-term volatility of the share price under any market condition but has no prominent influence on long-term volatility. b)Profitability. Margin trading enhances profitability in the bull market with an apparent leverage effect while having no significant effects on short-term profitability in the balanced market and the bear market. c) Individual shares with different attributes. The influences of margin trading on the large-cap and small-cap shares, shares with high vs. low PE ratio, shares included in the main board and SMEs stocks vary in different types of market. d) Liquidity. The influences of margin trading on the fluidity of market are significantly different in the bull, bear, and balanced markets.

Finally, I set up a new trading strategy based on the above conclusions. The result from hypothetical trading demonstrates that the newly-created trading strategy works better than the long-term holding strategy, highlighting the practical implications of this thesis in addition to its implications for research