Credit Provision and Stock Trading: Evidence From the South Sea Bubble

59 Pages Posted: 28 Jun 2019 Last revised: 5 Nov 2020

See all articles by Fabio Braggion

Fabio Braggion

Tilburg University - Tilburg University School of Economics and Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Rik Frehen

Tilburg University - Department of Finance

Emiel Jerphanion

University of Manchester - Division of Accounting and Finance

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Date Written: November 3, 2020

Abstract

This paper studies the mechanism that relates credit provision to asset prices. On one extreme, cheap credit may reduce the cost of capital and increase prices without trading. On the other extreme, naive borrowers may unsuccessfully ride a bubble. We collect every stock transaction for three major British companies during the 1720 South Sea Bubble. We find that loan holders are more likely to buy (sell) following high (low) returns. Loan holders also subscribe to overvalued shares and incur large trading losses. Our results are driven by traders self-selecting into credit facilities and by credit changing the trading behavior.

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

JEL Classification: G01, G12, G21, N23

Suggested Citation

Braggion, Fabio and Frehen, Rik and Jerphanion, Emiel, Credit Provision and Stock Trading: Evidence From the South Sea Bubble (November 3, 2020). Available at SSRN: https://ssrn.com/abstract=3410867 or http://dx.doi.org/10.2139/ssrn.3410867

Fabio Braggion (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Rik Frehen

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Emiel Jerphanion

University of Manchester - Division of Accounting and Finance ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

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