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

54 Pages Posted: 8 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

University of Manchester - Division of Accounting and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2020

Abstract

We study the relationship between credit, stock trading and asset prices. There is a wide array of channels through which credit provision can fuel stock prices. On one extreme, cheap credit reduces the cost of capital (discount rate) and boosts prices without trading or wealth transfers. On the other extreme, extrapolators use credit to ride a bubble and lose money. We construct a novel database containing every individual stock transaction for three major British companies during the 1720 South Sea Bubble. We link each trader's stock transactions to daily margin loan positions and subscriptions of new share issues. We find that margin loan holders are more likely to buy (sell) following high (low) returns. Loan holders also sign up to buy new shares of overvalued companies and incur large trading losses as a result of the bubble.

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

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 2020). CEPR Discussion Paper No. DP14532, Available at SSRN: https://ssrn.com/abstract=3594153

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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