Credit Line Undrawn Spreads and the Predictability of Stock Returns
2019 AEA Annual Meeting Paper, Atlanta
Posted: 14 Nov 2017 Last revised: 11 Aug 2023
Date Written: August 30, 2018
Abstract
This paper documents a new high risk-low return puzzle. Specfically, we find that a forward-looking risk measure extracted from credit line undrawn spreads negatively predicts borrowers' future stock returns. This negative risk-return relation is separate from previously documented asset pricing puzzles related to idiosyncratic volatility, analyst forecast dispersion, and credit risk. A long-short strategy based on this finding generates a significant alpha of over 7% per annum.
Keywords: Return Predictability, Asset Pricing, Credit Lines
JEL Classification: G12, G20
Suggested Citation: Suggested Citation