Quarterly Journal of Economics Vol. 132 No. 2 2017
Credit Expansion and Neglected Crash Risk*
Abstract
By analyzing 20 developed economies over 1920–2012, we find the following evidence of overoptimism and neglect of crash risk by bank equity investors during credit expansions: (i) 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; (ii) 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 (iii) 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.
- DOI
- 10.1093/qje/qjx004
- Volume
- 132
- Issue
- 2
- Pages
- 713-764
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref