Riding the Credit Boom
56 Pages Posted: 15 May 2018 Last revised: 11 Aug 2019
Date Written: August 9, 2019
From 2010-2015, China liberalized margin lending, resulting in an unprecedented expansion of margin loans to financially constrained households. We implement a regression discontinuity design based on the ranking procedure used during the deregulation and estimate a large impact of this credit boom on asset prices. However, this direct effect---the focus of most academic and policy work---is only half the story. As theory predicts, we find that unconstrained speculators front-ran predictably marginable stocks, generating price-overshooting. Among mid-cap stocks favored by households, the direct effect accounts for 20% of their 2015 bubble, while front-running led households to pay 8.5% higher prices.
Keywords: Credit Supply, Credit Boom, Leverage, Bubbles, Margin Lending, Stock Market, Speculation
JEL Classification: E44, E51, G00, G01, G02
Suggested Citation: Suggested Citation