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Shadow banking and the cross-section of stock returns

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  • Wei, Xin
  • Liu, Xi
  • Zhang, Xueyong

Abstract

This study investigates the role of shadow banking in the cross-sectional pricing of individual stocks. Using stock exposure to the shadow banking loan volume, we show that stocks in the lowest shadow banking beta quintile generate 3.6% more annualized returns compared to stocks in the highest shadow banking beta quintile. The result is consistent with Merton’s ICAPM and suggests that investors are willing to pay high prices for stocks with positive shadow banking beta and they need extra compensation to hold stocks with negative shadow banking beta. Our results remain robust after controlling for firm characteristics and formal finance beta.

Suggested Citation

  • Wei, Xin & Liu, Xi & Zhang, Xueyong, 2022. "Shadow banking and the cross-section of stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:intfin:v:81:y:2022:i:c:s1042443122001172
    DOI: 10.1016/j.intfin.2022.101645
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    Keywords

    Shadow banking; Cross-section of stock returns; ICAPM;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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