Anticipating the Direct Effects of Credit Supply
55 Pages Posted: 15 May 2018 Last revised: 19 Nov 2021
Date Written: November 18, 2021
We quantify how margin-lending liberalization shaped the boom and bust of the Chinese stock market from 2010-2015. In contrast to earlier efforts on how credit supply elevates asset valuations, we model not just the ex-post price effects of credit expansions but also anticipatory price effects due to buying by unconstrained investors. Using the staggered deregulation of margin lending across firms, we first present reduced-form evidence that the direct effect of lending qualification is anticipated. We then develop an information-revelation based model of rational anticipation that allows us to consistently estimate the size of anticipatory and direct effects using a linear dynamic panel approach. We use our model to conduct counterfactuals related to the timing of the government's decision to pause margin-lending liberalization due to financial-stability concerns.
Keywords: Credit Supply, Credit Boom, Margin Lending, Stock Market, Anticipation
JEL Classification: E44, E51, G00, G01, G02
Suggested Citation: Suggested Citation