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An intertemporal capital asset pricing model with bank credit growth as a state variable

Yacine Hammami () and Anna Lindahl

Journal of Banking & Finance, 2014, vol. 39, issue C, 14-28

Abstract: An ICAPM which includes bank credit growth as a state variable explains 94% of the cross-sectional variation in the average returns on the 25 Fama–French portfolios. We find compelling evidence that bank credit growth is priced in the cross-section of expected stock returns, even after controlling for well-documented asset pricing factors. These results are robust to the inclusion of industry portfolios in the set of test assets. They are also robust to the addition of firm characteristics and lagged instruments in the factor model. Bank credit growth is important because of its ability to predict business cycle variables as well as future labor income growth. These findings underscore the relevance of bank credit growth in stock pricing.

Keywords: Asset pricing models; Horse races; Predictability; Bank credit; Business cycle; Labor income (search for similar items in EconPapers)
JEL-codes: C10 C13 G12 G21 (search for similar items in EconPapers)
Date: 2014
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Handle: RePEc:eee:jbfina:v:39:y:2014:i:c:p:14-28