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

54 Pages Posted: 28 Jun 2019 Last revised: 13 May 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

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 23, 2020

Abstract

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

Braggion, Fabio and Frehen, Rik and Jerphanion, Emiel, Does Credit Affect Stock Trading? Evidence From the South Sea Bubble (March 23, 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

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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