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Shadow banks, leverage risks, and asset prices

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Listed:
  • Feng, Xu
  • Lu, Lei
  • Xiao, Yajun

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.

Suggested Citation

  • Feng, Xu & Lu, Lei & Xiao, Yajun, 2020. "Shadow banks, leverage risks, and asset prices," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:dyncon:v:111:y:2020:i:c:s0165188919302118
    DOI: 10.1016/j.jedc.2019.103816
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    1. Godfrey Marozva, 2020. "Liquidity Mismatch Index and Banks’ Stock Returns," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 930-945.

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    More about this item

    Keywords

    Bank-trust cooperation; Leverage factor; Intermediary asset pricing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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