The relation between bank credit growth and the expected returns of bank stocks

Research output: Contribution to journalArticlepeer-review

Abstract

Higher bank credit growth implies that excess returns of bank stocks over the next one year are lower by nearly 3%. Credit growth tracks bank stock returns over the business cycle and explains nearly 14% of the variation in bank stock returns over a 1-year horizon. I argue that the predictive variation in returns reflects investors' rational response to a small time-varying probability of a tail event that impacts banks and bank-dependent firms. Consistent with this hypothesis, the predictive power, as measured by the absolute magnitude of the coefficient on credit growth and the adjusted-R2 at the 1-year horizon, depend systematically on variables that regulate exposure to tail risk.

Original languageEnglish (US)
Pages (from-to)610-649
Number of pages40
JournalEuropean Financial Management
Volume24
Issue number4
DOIs
StatePublished - Sep 2018

All Science Journal Classification (ASJC) codes

  • Accounting
  • Economics, Econometrics and Finance(all)

Keywords

  • bank credit growth
  • bank equity returns
  • tail risk

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