The Leverage Factor: Credit Cycles and Asset Returns

Josh Davis and Alan Taylor

No 26435, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Research finds strong links between credit booms and macroeconomic outcomes like financial crises and output growth. Are impacts also seen in financial asset prices? We document this robust and significant connection for the first time using a large sample of historical data for many countries. Credit boom periods tend to be followed by unusually low returns to equities, in absolute terms and relative to bonds. Return predictability due to this leverage factor is distinct from that of established factors like momentum and value and generates trading strategies with meaningful excess profits out-of-sample. These findings pose a challenge to conventional macro-finance theories.

JEL-codes: E17 E20 E21 E32 E44 G01 G11 G12 G17 G21 N10 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-ifn, nep-mac and nep-ore
Note: AP DAE EFG IFM ME
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Citations: View citations in EconPapers (5)

Published as Josh Davis & Alan M. Taylor, 2022. "The Leverage Factor: Credit Cycles and Asset Returns," Management Science, vol 68(10), pages 7350-7361.

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Journal Article: The Leverage Factor: Credit Cycles and Asset Returns (2022)
Working Paper: The Leverage Factor: Credit Cycles and Asset Returns (2019)
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