Profitable Timing of the Stock Market with the Senior Loan Officer Survey

Abstract

The loan standards question in the Federal Reserve’s quarterly Senior Loan Officer Survey is shown to be predictive of quarterly stock returns a month or two after its release. This is an apparent violation of semi-strong form stock market efficiency. Out-of-sample, we use this signal and develop a simple risk and alpha model to market time the S&P 500. It outperformed the S&P 500 with a Sharpe (1966) ratio of 1.9 versus 0.34 for passive investment.

Keywords: alpha, commercial and industrial loans, investing, loan standards, market efficiency, market timing, stock market, portfolio theory, returns, risk-model, semi-strong form, Senior Loan Officer Survey, Sharpe ratio, survey

JEL Classification: G11, G14, G17, G21