Riding the Credit Boom
Research on leverage and asset-price fluctuations focuses on the direct effect of lax bank lending enabling financially-constrained investors to take excessive risks. Ignored are unconstrained investors speculating on higher prices during credit booms. To identify these two effects, we utilize China's staggered liberalization of stock-margin lending from 2010-2015—which encouraged a bank/brokerage-credit-fueled stock-market bubble. The direct effect is a 25 cent increase in a stock's market capitalization for each dollar of margin debt. Unconstrained investors led to an even larger increase in valuations of an additional 32 cents as they speculated on stocks likely to qualify for lending.
We thank Emi Nakamura, Haizhou Huang, Matthieu Gomez and seminar participants at Columbia University for helpful comments, and Jingxuan Chen for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.