Shadow banks, leverage risks, and asset prices

Xu Feng, Lei Lu and Yajun Xiao

Journal of Economic Dynamics and Control, 2020, vol. 111, issue C

Abstract: Trust companies generate leverage cycle dynamics by intermediating less regulated credit to the financial markets in China. We find that the leverage factor constructed from trust companies can explain the time-series and cross-sectional asset returns. The leverage factor derived from securities companies does not possess the same explanatory power, despite these companies being legitimate financing sources of leveraged investment. Our results provide new evidence that the financial innovations created by shadow banks significantly amplify leverage in less sophisticated financial markets. This not only affects financial fragility, but also determines asset prices.

Keywords: Bank-trust cooperation; Leverage factor; Intermediary asset pricing (search for similar items in EconPapers)
JEL-codes: G10 G12 G20 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:111:y:2020:i:c:s0165188919302118

DOI: 10.1016/j.jedc.2019.103816

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