Does Credit Affect Stock Trading? Evidence From the South Sea Bubble

41 Pages Posted: 28 Jun 2019

See all articles by Fabio Braggion

Fabio Braggion

Tilburg University - Center and Faculty of Economics and Business Administration; Tilburg University - European Banking Center

Rik Frehen

Tilburg University - Department of Finance

Emiel Jerphanion

Tilburg University - Department of Finance; Tilburg University - Center for Economic Research (CentER)

Date Written: May 27, 2019

Abstract

We study the relationship between credit, stock trading and prices bubbles. The role of credit in financial bubbles is theoretically ambiguous. On the one hand, it may help rational arbitrageurs to trade against a bubble; on the other hand, it may enable naive speculators to buy overvalued assets. We construct a novel database containing every individual stock transaction in three major British companies during the 1720 South Sea Bubble. We link these transactions to daily margin loan positions and subscription lists of new share issues. We find that margin loan holders acted as extrapolators, i.e., they were more likely to buy (sell) following high (low) past returns. Loan holders also signed up to buy new shares of overvalued companies and incurred large trading losses. Our results suggest that credit provision was instrumental in fueling the bubble.

Keywords: Bubble, Credit Provision, Margin Loans, Investor Behavior

JEL Classification: G01, G12, G21, N23

Suggested Citation

Braggion, Fabio and Frehen, Rik and Jerphanion, Emiel, Does Credit Affect Stock Trading? Evidence From the South Sea Bubble (May 27, 2019). Available at SSRN: https://ssrn.com/abstract=3410867 or http://dx.doi.org/10.2139/ssrn.3410867

Fabio Braggion (Contact Author)

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - European Banking Center ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Rik Frehen

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Emiel Jerphanion

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://sites.google.com/view/emieljerphanion/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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