Investing in Crises

85 Pages Posted: 8 Mar 2021

See all articles by Matthew Baron

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Julien Pénasse

Universite du Luxembourg

Yevhenii Usenko

Massachusetts Institute of Technology (MIT) - Sloan School of Management

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Date Written: January 7, 2021

Abstract

We investigate asset returns around banking crises in 44 advanced and emerging economies from 1960 to 2018. In contrast to the view that buying assets during banking crises is a profitable long-run strategy, we find returns of equity and other asset classes generally underperform after banking crises. While prices are depressed during crises and partially recover after acute stress ends, consistent with theories of fire sales and intermediary-based asset pricing, we argue that investors do not fully anticipate the consequences of debt overhang, which result in lower long-run dividends. Our results on bank stock underperformance suggest that government-funded bank recapitalizations can often lead to substantial taxpayer losses.

Keywords: banking crises, international financial markets, debt overhang

JEL Classification: G01, G11, G12, G15, G21

Suggested Citation

Baron, Matthew and Laeven, Luc A. and Pénasse, Julien and Usenko, Yevhenii, Investing in Crises (January 7, 2021). Available at SSRN: https://ssrn.com/abstract=3762043 or http://dx.doi.org/10.2139/ssrn.3762043

Matthew Baron (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Julien Pénasse

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Yevhenii Usenko

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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