Credit and bubbles Rik Frehen

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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 between 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.

The authors have also written a blog about this research: www.tilburguniversity.edu/tisem/bubble