Credit Conditions and Stock Return Predictability
53 Pages Posted: 19 Mar 2010 Last revised: 26 Oct 2015
Date Written: September 13, 2014
We analyze U.S. stock return predictability using a measure of credit standards (Standards) derived from the Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices. Standards is a strong predictor of stock returns at a business cycle frequency, especially in the post-1990 data period. Empirically, a tightening of Standards predicts lower future stock returns. Standards performs well both in-sample and out-of-sample and is robust to a host of consistency checks. Standards captures stock return predictability at a business cycle frequency and is driven primarily by the ability of Standards to predict cash flow news.
Keywords: Stock predictability, credit supply, macroeconomics, survey data
JEL Classification: E44, G12, G14, G17, G21
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