Working Paper: NBER ID: w24586
Authors: Christopher Hansman; Harrison Hong; Wenxi Jiang; Yujane Liu; Jujuan Meng
Abstract: Household credit expansions often coincide with high stock-market valuations, but identifying a causal relationship remains challenging. Because unconstrained arbitrageurs play a pivotal role in stock-pricing, the impact of credit is not obvious (despite evidence in less-liquid housing markets). Further, given margin restrictions, credit may leak into stock prices in difficult-to-measure ways. We address these issues using an unprecedented 2010-2015 regulatory expansion of margin lending in China. Institutional fund trades and regression discontinuity evidence suggest a positive impact on prices that was largely anticipated by unconstrained investors. We develop a dynamic panel model of stock prices and recover large causal estimates.
Keywords: Credit expansion; Stock market; Margin lending; Causal relationship
JEL Codes: E51; E71; G01; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in margin lending (G21) | Increase in demand for stocks (G17) |
| Increase in demand for stocks (G17) | Increase in stock prices (G10) |
| Anticipated effects of credit expansion (E51) | Adjustments by institutional investors (G23) |
| Institutional investors overweighting stocks likely to become marginable (G23) | Profits from anticipating deregulation (L51) |
| Deregulation of margin lending (G18) | Increase in stock prices (G10) |
| Deregulation of margin lending (G18) | Cumulative returns higher for stocks above marginability threshold (G12) |