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Lending and bubbles Rik Frehen, Fabio Braggion, and Emiel Jerphanion of Tilburg School of Economics and Management are conducting research into the relationship Âbetween cheap credit (low interest rates) and stock market speculation. They are studying whether access to cheap credit leads to speculative behavior among investors. Given the unprecedented low interest rates at the moment, this is a very relevant question. However, the question is difficult to answer because there may be many reasons why investors take out credit. In order to gain insight into the relationship between the granting of credit and speculation, the researchers dived into history. Based on very detailed historical stock transactions, they are studying the trading behavior of over 15,000 investors involved in the so-called South Sea Bubble in 1720. They conclude that cheap credit contributed to overvaluation and, ultimately, to the bursting of the bubble.
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The authors have also written a blog about this research: www.tilburguniversity.edu/tisem/bubble Illustration: cartoon by William Hogarth depicting the chaos of the downfall of the South Sea ÂCompany in 1720.
