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Leverage and beliefs: personal experience and risk taking in margin lending


Koudijs, Peter; Voth, Hans-Joachim (2014). Leverage and beliefs: personal experience and risk taking in margin lending. Working paper series / Department of Economics 148, University of Zurich.

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 as before. The differential change is remarkable since the distress was public knowledge. Overall leverage in the Amsterdam stock market declined as a result.

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 as before. The differential change is remarkable since the distress was public knowledge. Overall leverage in the Amsterdam stock market declined as a result.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:G12, G23, N23, G01, G02
Uncontrolled Keywords:Leverage, collateralized lending, haircuts, personal experience
Language:English
Date:March 2014
Deposited On:26 Mar 2014 17:15
Last Modified:15 Aug 2017 08:20
Series Name:Working paper series / Department of Economics
Number of Pages:67
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp148.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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