Effects of Credit Expansions on Stock Market Booms and Busts

Christopher Hansman, Harrison Hong, Wenxi Jiang, Yu-Jane Liu and Juan-Juan Meng

The Review of Financial Studies, 2025, vol. 38, issue 5, 1502-1544

Abstract: There is causal evidence that mortgage credit expansions increase house prices. Does an expansion of margin lending increase stock prices? Because unconstrained arbitrageurs are more important for pricing stocks than homes, the impact is not obvious. Tests are limited because sizable shocks to margin lending are rare. We examine a major Chinese margin-lending expansion between 2010 and 2015. Institutional holding, regression discontinuity, and event study evidence—exploiting the rollout of margin lending across stocks—shows that arbitrageurs anticipated and bought in advance of a significant causal effect of credit. We develop a model to rationalize our findings. Our estimates suggest that margin debt contributes to stock market fluctuations.

JEL-codes: G01 G11 G12 G18 (search for similar items in EconPapers)
Date: 2025
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