Shadow Banks, Leverage Risks, and Asset Prices

54 Pages Posted: 7 Mar 2019 Last revised: 17 Mar 2020

See all articles by Feng Xu

Feng Xu

Tianjin University - College of Management and Economics

Lei Lu

Asper School of Business, University of Manitoba

Yajun Xiao

University College Dublin (UCD)

Date Written: April 21, 2019

Abstract

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

Xu, Feng and Lu, Lei and Xiao, Yajun, Shadow Banks, Leverage Risks, and Asset Prices (April 21, 2019). Journal of Economic Dynamics and Control, Vol. 111, 2020, Available at SSRN: https://ssrn.com/abstract=3335993 or http://dx.doi.org/10.2139/ssrn.3335993

Feng Xu

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Lei Lu (Contact Author)

Asper School of Business, University of Manitoba ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Yajun Xiao

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland

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