The commercial bank leverage factor in U.S. asset prices

Marius M. Mihai

The Quarterly Review of Economics and Finance, 2022, vol. 86, issue C, 156-171

Abstract: I present novel results on a commercial bank leverage factor that drives U.S. asset prices. Portfolios which load negatively on this risk factor and are comprised of firms that are less resilient in credit expansions earn higher returns on average. In the time-series, a simple buy-and-hold strategy of the market index at medium- and long-horizons illustrates how investors can profit on the commercial bank loan cycle and earn higher returns and Sharpe ratios in recoveries and early stages of an expansion as opposed to credit booms.

Keywords: Commercial bank leverage factor; Credit boom probability; Risk-premium; Sharpe ratio; Cross-section of returns (search for similar items in EconPapers)
JEL-codes: E51 G17 G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:86:y:2022:i:c:p:156-171

DOI: 10.1016/j.qref.2022.07.004

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