DP14532 Does credit affect stock trading? Evidence from the South Sea Bubble
|Author(s):||Fabio Braggion, Rik Frehen, Emiel Jerphanion|
|Publication Date:||March 2020|
|Keyword(s):||Bubble, Credit Provision, Investor Behavior, Margin Loans|
|JEL(s):||G01, G12, G21, N23|
|Programme Areas:||Financial Economics, Economic History|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14532|
We study the relationship between credit, stock trading and asset prices. There is a wide array of channels through which credit provision can fuel stock prices. On one extreme, cheap credit reduces the cost of capital (discount rate) and boosts prices without trading or wealth transfers. On the other extreme, extrapolators use credit to ride a bubble and lose money. We construct a novel database containing every individual stock transaction for three major British companies during the 1720 South Sea Bubble. We link each trader's stock transactions to daily margin loan positions and subscriptions of new share issues. We find that margin loan holders are more likely to buy (sell) following high (low) returns. Loan holders also sign up to buy new shares of overvalued companies and incur large trading losses as a result of the bubble.