Working Paper: CEPR ID: DP14532
Authors: Fabio Braggion; Rik Frehen; Emiel Jerphanion
Abstract: This paper studies the mechanism that relates credit provision to asset prices. On one extreme, cheap credit may reduce the cost of capital and increase prices without trading. On the other extreme, naive borrowers may unsuccessfully ride a bubble. We collect every stock transaction for three major British companies during the 1720 South Sea Bubble. We find that loan holders are more likely to buy (sell) following high (low) returns. Loan holders also subscribe to overvalued shares and incur large trading losses. Our results are driven by traders self-selecting into credit facilities and by credit changing the trading behavior.
Keywords: bubble; credit provision; margin loans; investor behavior
JEL Codes: G01; G12; G21; N23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit provision (G21) | trading behavior (G41) |
| loan holders (G51) | likelihood of buying shares after high returns (G17) |
| loan holders (G51) | likelihood of selling shares after low returns (G17) |
| loan holders (G51) | subscription to new share offerings at peak prices (G24) |
| loan holders (G51) | trading losses (G33) |
| selection effects + treatment effects (C24) | poor trading outcomes for loan holders (G21) |
| loan holders (G51) | positions inconsistent with reverting prices (P22) |