Leverage and Beliefs: Personal Experience and Risk-Taking in Margin Lending
American Economic Review
vol. 106,
no. 11, November 2016
(pp. 3367-3400)
Abstract
What determines risk-bearing capacity and the amount of leverage in financial markets? Using unique archival data on collateralized lending, we show that personal experience can affect individual risk-taking and aggregate leverage. When an investor syndicate speculating in Amsterdam in 1772 went bankrupt, many lenders were exposed. In the end, none of them actually lost money. Nonetheless, only those at risk of losing money changed their behavior markedly; they lent with much higher haircuts. The rest continued largely as before. The differential change is remarkable since the distress was public knowledge. Overall leverage in the Amsterdam stock market declined as a result.Citation
Koudijs, Peter, and Hans-Joachim Voth. 2016. "Leverage and Beliefs: Personal Experience and Risk-Taking in Margin Lending." American Economic Review, 106 (11): 3367-3400. DOI: 10.1257/aer.20140259Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D86 Economics of Contract: Theory
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- G14 Information and Market Efficiency; Event Studies; Insider Trading
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G33 Bankruptcy; Liquidation
- N23 Economic History: Financial Markets and Institutions: Europe: Pre-1913