Credit Expansion and Neglected Crash Risk / Matthew Baron, Wei Xiong.

Format:

Book

Author/Creator:

Baron, Matthew.

Contributor:

National Bureau of Economic Research.

Xiong, Wei.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22695.

NBER working paper series no. w22695

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

By analyzing 20 developed countries over 1920-2012, we find the following evidence of overoptimism and neglect of crash risk by bank equity investors during credit expansions: 1) bank credit expansion predicts increased bank equity crash risk, but despite the elevated crash risk, also predicts lower mean bank equity returns in subsequent one to three years; 2) conditional on bank credit expansion of a country exceeding a 95th percentile threshold, the predicted excess return for the bank equity index in subsequent three years is -37.3%; and 3) bank credit expansion is distinct from equity market sentiment captured by dividend yield and yet dividend yield and credit expansion interact with each other to make credit expansion a particularly strong predictor of lower bank equity returns when dividend yield is low.

Notes:

Print version record

September 2016.