Effects of Credit Expansions on Stock Market Booms and Busts

Christopher Hansman, Harrison Hong, Wenxi Jiang, Yu-Jane Liu () and Juanjuan Meng ()

No 24586, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E51 E71 G01 G4 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-ban, nep-cna and nep-tra
Note: AP CF
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Citations: View citations in EconPapers (3)

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