NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Matthew Baron

Johnson Graduate School of Management
Cornell University
401J Sage Hall
Ithaca, NY 14853-6201
Tel: 607-255-8686

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Institutional Affiliation: Cornell University

NBER Working Papers and Publications

September 2016Credit Expansion and Neglected Crash Risk
with Wei Xiong: w22695
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 ...

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

 
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