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

Fabio Braggion, Rik Frehen, and Emiel Jerphanion

This paper studies the relation between credit provision and stock trading behavior. We collect every stock transaction of three major British companies during the 1720 South Sea Bubble and link stock trading to margin loan positions with the Bank of England. We provide insight into the selection of traders into the loan facility by comparing the trading behavior and realized returns of borrowers to those of other traders. We find that loan holders are more likely to buy following high returns and document strong underperformance of borrowers.

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