Does Credit Affect Stock Trading? Evidence From the South Sea Bubble
54 Pages Posted: 28 Jun 2019 Last revised: 13 May 2020
Date Written: March 23, 2020
This paper identifies the mechanism through which credit fuels asset prices. On one extreme, cheap credit may reduce the cost of capital increasing prices without trading. On the other extreme, borrowers may transfer wealth to rational arbitrageurs by unsuccessfully riding a bubble. We collect every individual stock transaction for three major companies during the 1720 South Sea Bubble. We link traders’ transactions to margin loan positions and shares subscriptions. We find that margin loan holders are more likely to buy (sell) following high (low) returns. They subscribe to new issues of overvalued shares and incur large losses.
Keywords: Bubble, Credit Provision, Margin Loans, Investor Behavior
JEL Classification: G01, G12, G21, N23
Suggested Citation: Suggested Citation