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

58 Pages Posted: 28 Jun 2019 Last revised: 6 Aug 2021

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: August 5, 2021

Abstract

This paper studies the mechanisms that relate credit provision to asset prices. Credit provision may affect prices via various channels with different implications for trading behavior, loan defaults and realized returns. 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 following high returns. Loan holders also subscribe to overvalued stocks and incur large trading losses. We find evidence of extrapolating investors self-selecting into a credit facility. We also document that moral hazard leads to increased risk taking and larger losses.

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 (August 5, 2021). 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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