Credit-Market Sentiment and the Business Cycle

We estimate a macroeconomic model on US data where banks lend to households and businesses and simultaneously adjust lending requirements on the two types of loans. We find that the collateral shock, a change in the ability of the financial sector to redeploy collateral, is the most important force driving the business cycle. Hit by this unique disturbance, our model quantitatively replicates the joint dynamics of output, consumption, investment, employment, and both household and business credit quantities and spreads. The estimated collateral shock generates accurate movements in lending standards and tracks measures of market sentiment. (JEL E21, E23, E24, E32, E44, G21)

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Credit market frictions and the allocation of resources over the business cycle

Journal of Monetary Economics ◽

10.1016/j.jmoneco.2002.11.001 ◽

2003 ◽

Vol 50 (8) ◽

pp. 1795-1818 ◽

Cited By ~ 49

Author(s):

Gadi Barlevy

Keyword(s):

Business Cycle ◽

Credit Market ◽

Market Frictions ◽

Allocation Of Resources ◽

Credit Market Frictions ◽

The Business Cycle

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“Animal spirits” and bank’s lending behaviour, a disequilibrium approach

Studies in Nonlinear Dynamics & Econometrics ◽

10.1515/snde-2016-0095 ◽

2019 ◽

Vol 24 (2) ◽

Author(s):

Carl Chiarella ◽

Corrado Di Guilmi ◽

Tianhao Zhi

Keyword(s):

Business Cycle ◽

Dynamic Model ◽

Credit Market ◽

Collective Behaviour ◽

Supply Side ◽

Real Economy ◽

Animal Spirits ◽

Credit Cycle ◽

The Business Cycle

AbstractThe paper analyses from a disequilibrium perspective the role of banks’ “animal spirits” and collective behaviour in the creation of credit that, ultimately, determines the credit cycle. In particular, we propose a dynamic model to analyse how the transmission of waves of optimism and pessimism in the supply side of the credit market interacts with the business cycle. We adopt the Weidlich-Haag-Lux approach to model the opinion contagion of bankers. We test different assumptions on banks’ behaviour and find that opinion contagion and herding amongst banks play an important role in propagating the credit cycle and destabilizing the real economy. The boom phases trigger banks’ optimism that collectively lead the banks to lend excessively, thus reinforcing the credit bubble. Eventually the bubbles collapse due to an over-accumulation of debt, leading to a restrictive phase in the credit cycle.

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Credit-Market Sentiment and the Business Cycle*

The Quarterly Journal of Economics ◽

10.1093/qje/qjx014 ◽

2017 ◽

Vol 132 (3) ◽

pp. 1373-1426 ◽

Cited By ~ 56

Author(s):

David López-Salido ◽

Jeremy C. Stein ◽

Egon Zakrajšek

Keyword(s):

Economic Activity ◽

Financial Frictions ◽

Investor Sentiment ◽

Credit Market ◽

Market Conditions ◽

Market Sentiment ◽

External Finance ◽

Credit Supply ◽

The Business Cycle

Abstract Using U.S. data from 1929 to 2015, we show that elevated credit-market sentiment in year t − 2 is associated with a decline in economic activity in years t and t + 1. Underlying this result is the existence of predictable mean reversion in credit-market conditions. When credit risk is aggressively priced, spreads subsequently widen. The timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t − 2 also forecasts a change in the composition of external finance: net debt issuance falls in year t, while net equity issuance increases, consistent with the reversal in credit-market conditions leading to an inward shift in credit supply. Unlike much of the current literature on the role of financial frictions in macroeconomics, this article suggests that investor sentiment in credit markets can be an important driver of economic fluctuations.

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Liquidity and the business cycle: Empirical evidence from the Greek banking sector

Economic Annals ◽

10.2298/eka1399109v ◽

2013 ◽

Vol 58 (199) ◽

pp. 109-125

Author(s):

Sophocles Vogiazas ◽

Constantinos Alexiou

Keyword(s):

Business Cycle ◽

Banking Sector ◽

Market Liquidity ◽

Market Sentiment ◽

Clear Cut ◽

Effective Exchange ◽

The Business Cycle ◽

Greek Banks ◽

Asset Quality ◽

Effective Exchange Rate

In the aftermath of the global financial turmoil the negative market sentiment and the challenging macroeconomic environment in Greece have severely affected the banking sector, which faces funding and liquidity challenges, deteriorating asset quality, and weakening profitability. This paper aims to investigate how banks? liquidity interacted with solvency and the business cycle during the period 2004-2010. To this end a panel of 17 Greek banks is utilized which, in conjunction with cointegrating techniques and one-way static and dynamic panel models, explores the presence and the strength of the relationship between banks? liquidity and the business cycle, while allowing for the role of banks? solvency. Addressing the liquidity risk of the Greek banking sector and the liquidity-solvency nexus remains largely an uncharted area. The results generated provide clear-cut evidence on the linkages between banks? market liquidity and the business cycle, as reflected in the real GDP and the effective exchange rate. Yet the results display a transmission channel that runs from banks? solvency to liquidity and from country risk to bank risk.

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A State-Space Version of Fama and French’s Three-Factor Model: Evidence from the Tunisian Stock Exchange

International Journal of Business and Management ◽

10.5539/ijbm.v11n11p214 ◽

2016 ◽

Vol 11 (11) ◽

pp. 214

Author(s):

Nejla Bergaoui ◽

Abdelwahed Trabelsi

Keyword(s):

Business Cycle ◽

State Space ◽

Factor Model ◽

Stock Exchange ◽

Credit Market ◽

Market Conditions ◽

Macroeconomic Factors ◽

The Business Cycle ◽

Fama And French ◽

Three Factor

We develop a state-space version of the three-factor model of Fama and French (1993) for exploring the macroeconomic determinants of risk underlying size (SMB) and value (HML) factors. To the best of our knowledge, this is the first study that examines how loadings on HML and SMB factors are affected by unanticipated changes in macroeconomic factors and whether they exhibit an asymmetric behavior over the business cycle. We test the hypothesis that the betas associated with HML and SMB factors of firms with different size or a different BE/ME ratio react differently to changes in macroeconomic conditions. In addition to the hypothesis that some type of stocks (value and small ones) become more responsive to such a change during period of economic contraction than during an expansion. Our focus is the Tunisian stock Exchange. The evidence we found supports the time variation of portfolios returns’ sensitivities to market, HML and SMB factors with unanticipated changes in monetary and economic conditions. Hence, the assumption of constant coefficients in the traditional three-factor model seems to be unreasonable. Betas associated with HML and SMB factors showed countercyclical behavior through the phases of the business cycle. In a recession, value (small) firm’s risk associated with the HML (SMB) factor is more strongly affected by worsening credit market conditions than during an economic expansion. Further results show that value (small) firm’s risk associated with the HML (SMB) factor is more strongly affected by tighter credit market conditions than growth (large) firm’s risk. Thus, our results most closely support a risk-based explanation for SMB and HML.

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