Working Paper: CEPR ID: DP9920
Authors: Peter Koudijs; Hansjoachim Voth
Abstract: What determines risk-bearing capacity and the amount of leverage in financial markets? Using unique archival data on collateralized lending, we show that personal experience can affect individual risk-taking and aggregate leverage. When an investor syndicate speculating in Amsterdam in 1772 went bankrupt, many lenders were exposed. In the end, none of them actually lost money. Nonetheless, only those at risk of losing money changed their behavior markedly ? they lent with much higher haircuts. The rest continued as before. The differential change is remarkable since the distress was public knowledge. Overall leverage in the Amsterdam stock market declined as a result.
Keywords: collateralized lending; haircuts; leverage; personal experience
JEL Codes: G21; N13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased haircuts (F31) | more conservative lending practices (G21) |
| personal experience (C90) | risk tolerance (G11) |
| not exposed lenders (G21) | unchanged lending practices (G21) |
| overall leverage in the Amsterdam stock market (G12) | behavioral changes among lenders (G21) |
| lenders' exposure to the Seppenwolde bankruptcy (G33) | increased haircuts (F31) |
| exposed lenders (G21) | differential change in haircuts (C69) |