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Credit conditions and stock return predictability

Sudheer Chava, Michael Gallmeyer () and Heungju Park

Journal of Monetary Economics, 2015, vol. 74, issue C, 117-132

Abstract: U.S. stock return predictability is analyzed using a measure of credit standards (Standards) derived from the Federal Reserve Board׳s Senior Loan Officer Opinion Survey on Bank Lending Practices. Standards is a strong predictor of stock returns at a business cycle frequency, especially in the post-1990 data period. Empirically, a tightening of Standards predicts lower future stock returns. Standards performs well both in-sample and out-of-sample and is robust to a host of consistency checks. Standards captures stock return predictability at a business cycle frequency and is driven primarily by the ability of Standards to predict cash flow news.

Keywords: Stock predictability; Credit supply; Macroeconomics; Survey data (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:74:y:2015:i:c:p:117-132

DOI: 10.1016/j.jmoneco.2015.06.004

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Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

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