Credit Provision and Stock Trading: Evidence from the South Sea Bubble

Fabio Braggion, Rik Frehen and Emiel Jerphanion

No 14532, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: G01 G12 G21 N23 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-his and nep-hpe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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