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Effects of Credit Expansions on Stock Market Booms and Busts

Author

Listed:
  • Christopher Hansman
  • Harrison Hong
  • Wenxi Jiang
  • Yu-Jane Liu
  • Juan-Juan Meng

Abstract

Household credit expansions often coincide with high stock-market valuations, but identifying a causal relationship remains challenging. Because unconstrained arbitrageurs play a pivotal role in stock-pricing, the impact of credit is not obvious (despite evidence in less-liquid housing markets). Further, given margin restrictions, credit may leak into stock prices in difficult-to-measure ways. We address these issues using an unprecedented 2010-2015 regulatory expansion of margin lending in China. Institutional fund trades and regression discontinuity evidence suggest a positive impact on prices that was largely anticipated by unconstrained investors. We develop a dynamic panel model of stock prices and recover large causal estimates.

Suggested Citation

  • Christopher Hansman & Harrison Hong & Wenxi Jiang & Yu-Jane Liu & Juan-Juan Meng, 2018. "Effects of Credit Expansions on Stock Market Booms and Busts," NBER Working Papers 24586, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24586
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    Cited by:

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    2. Zhang, Yixing & Jia, Qinmin & Chen, Chen, 2021. "Risk attitude, financial literacy and household consumption: Evidence from stock market crash in China," Economic Modelling, Elsevier, vol. 94(C), pages 995-1006.
    3. Ma, Rufei & Deng, Chengtao & Cai, Huan & Zhai, Pengxiang, 2019. "Does Shanghai-Hong Kong Stock Connect drive market comovement between Shanghai and Hong Kong: A new evidence," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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    More about this item

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G4 - Financial Economics - - Behavioral Finance

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