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.
Original language | English (US) |
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Pages (from-to) | 713-764 |
Number of pages | 52 |
Journal | Quarterly Journal of Economics |
Volume | 132 |
Issue number | 2 |
DOIs | |
State | Published - May 1 2017 |
All Science Journal Classification (ASJC) codes
- Economics and Econometrics