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Leverage and Beliefs: Personal Experience and Risk Taking in Margin Lending

Peter Koudijs and Hans-Joachim Voth

No 148, ECON - Working Papers from Department of Economics - University of Zurich

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 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; collateralized lending; haircuts; personal experience (search for similar items in EconPapers)
JEL-codes: G12 G23 N23 G01 G02 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-ban and nep-cfn
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Related works:
Journal Article: Leverage and Beliefs: Personal Experience and Risk-Taking in Margin Lending (2016) Downloads
Working Paper: Leverage and Beliefs: Personal Experience and Risk Taking in Margin Lending (2014) Downloads
Working Paper: Leverage and Beliefs: Personal Experience and Risk Taking in Margin Lending (2014) Downloads
Working Paper: Leverage and Beliefs: Personal Experience and Risk Taking in Margin Lending (2014) Downloads
Working Paper: Leverage and beliefs: Personal experience and risk taking in margin lending (2013) Downloads
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