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

University of Zurich, Department of Economics, Working Paper No. 148

68 Pages Posted: 28 Mar 2014  

Peter Koudijs

Stanford GSB; National Bureau of Economic Research (NBER)

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: March 2014

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

JEL Classification: G12, G23, N23, G01, G02

Suggested Citation

Koudijs, Peter and Voth, Hans-Joachim, Leverage and Beliefs: Personal Experience and Risk Taking in Margin Lending (March 2014). University of Zurich, Department of Economics, Working Paper No. 148. Available at SSRN: https://ssrn.com/abstract=2416429 or http://dx.doi.org/10.2139/ssrn.2416429

Peter Koudijs (Contact Author)

Stanford GSB ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society ( email )

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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