Shadow Banks, Leverage Risks, and Asset Prices
54 Pages Posted: 7 Mar 2019 Last revised: 17 Mar 2020
Date Written: April 21, 2019
Trust companies generate leverage cycle dynamics by intermediating less regulated credit to the financial markets in China. We find that the leverage factor constructed from trust companies can explain the time-series and cross-sectional asset returns. The leverage factor derived from securities companies does not possess the same explanatory power, despite these companies being legitimate financing sources of leveraged investment. Our results provide new evidence that the financial innovations created by shadow banks significantly amplify leverage in less sophisticated financial markets. This not only affects financial fragility, but also determines asset prices.
Keywords: bank-trust cooperation, leverage factor, intermediary asset pricing
JEL Classification: G10, G12, G20
Suggested Citation: Suggested Citation