Credit Expansion and Neglected Crash Risk

Matthew Baron and Wei Xiong

No 22695, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E02 E03 G01 G02 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-mac
Note: AP CF IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Published as Matthew Baron & Wei Xiong, 2017. "Credit Expansion and Neglected Crash Risk*," The Quarterly Journal of Economics, vol 132(2), pages 713-764.

Downloads: (external link)
http://www.nber.org/papers/w22695.pdf (application/pdf)

Related works:
Journal Article: Credit Expansion and Neglected Crash Risk (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:22695

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w22695

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).