Credit Provision and Stock Trading: Evidence from the South Sea Bubble
62 Pages Posted: 8 May 2020 Last revised: 14 Jul 2021
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Credit Provision and Stock Trading: Evidence From the South Sea Bubble
Date Written: March 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.
JEL Classification: G01, G12, G21, N23
Suggested Citation: Suggested Citation