Working Paper: NBER ID: w19957
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 largely 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: leverage; risk-taking; margin lending; financial markets; personal experience
JEL Codes: G01; G02; G12; G21; G32; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| personal experience (C90) | individual risk-taking (D81) |
| personal experience (C90) | aggregate leverage (E10) |
| bankruptcy of the Seppenwolde syndicate (G33) | lenders' beliefs about risk (G21) |
| lenders' beliefs about risk (G21) | lending behavior (G21) |
| exposed lenders (G21) | increased collateral requirements (haircuts) (F65) |
| unexposed lenders (G21) | continued lending practices (G21) |
| increased collateral requirements (haircuts) (F65) | overall decline in leverage (G32) |
| lenders who almost lost money (G21) | more conservative lending practices (G21) |
| lenders' altered perceptions of risk (G21) | significant changes in haircuts (F31) |