The Relation between Credit Growth and the Expected Returns of Bank Stocks

54 Pages Posted: 4 Oct 2011 Last revised: 4 May 2018

See all articles by Priyank Gandhi

Priyank Gandhi

Rutgers Business School, Newark and New Brunswick

Date Written: April 17, 2018

Abstract

Higher bank credit growth implies that excess returns of bank stocks over the next one year are lower by nearly 3%. Credit growth tracks bank stock returns over the business cycle and explains nearly 14% of the variation in bank stock returns over a 1-year horizon. I argue that the predictive variation in returns reflects investors' rational response to a small time-varying probability of a tail event that impacts banks and bank-dependent firms. Consistent with this hypothesis, the predictive power, as measured by the absolute magnitude of the coefficient on credit growth and the adjusted-R^2 at the 1-year horizon, depends systematically on variables that regulate exposure to tail risk.

Keywords: Bank equity returns, Tail risk, Bank credit growth

JEL Classification: G01, G02, G15, G21

Suggested Citation

Gandhi, Priyank, The Relation between Credit Growth and the Expected Returns of Bank Stocks (April 17, 2018). Available at SSRN: https://ssrn.com/abstract=1937997 or http://dx.doi.org/10.2139/ssrn.1937997

Priyank Gandhi (Contact Author)

Rutgers Business School, Newark and New Brunswick ( email )

111 Washington Avenue
Newark, NJ 07102
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
149
Abstract Views
754
rank
202,530
PlumX Metrics