The Leverage Factor: Credit Cycles and Asset Returns

Alan Taylor and Josh Davis

No 14115, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Debt; Leverage; Cycles; Asset pricing; Return predictability; Asset allocation (search for similar items in EconPapers)
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-fdg, nep-his, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
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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