The Leverage Factor: Credit Cycles and Asset Returns
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.
- Market leverage has historically predicted one-year-ahead stock returns better than measures of stock market momentum, and almost as...
Josh Davis & Alan M. Taylor, 2022. "The Leverage Factor: Credit Cycles and Asset Returns," Management Science, vol 68(10), pages 7350-7361. citation courtesy of