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    Credit Conditions and Stock Return Predictability

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    PARK-DISSERTATION.pdf (553.0Kb)
    Date
    2012-10-19
    Author
    Park, Heungju
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    Abstract
    This dissertation examines stock return predictability with aggregate credit conditions. The aggregate credit conditions are empirically measured by credit standards (Standards) derived from the Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices. Using Standards, this study investigates whether the aggregate credit conditions predict the expected returns and volatility of the stock market. The first essay, "Credit Conditions and Expected Stock Returns," analyzes the predictability of U.S. aggregate stock returns using a measure of credit conditions, Standards. The analysis reveals that Standards is a strong predictor of stock returns at a business cycle frequency, especially in the post-1990 data period. Empirically the essay demonstrates that a tightening of Standards predicts lower future stock returns. Standards performs well both in-sample and out-of-sample and is robust to a host of consistency checks including a small sample analysis. The second essay, "Credit Conditions and Stock Return Volatility," examines the role played by credit conditions in predicting aggregate stock market return volatility. The essay employs a measure of credit conditions, Standards in the stock return volatility prediction. Using the level and the log of realized volatility as the estimator of the stock return volatility, this study finds that Standards is a strong predictor of U.S. stock return volatility. Overall, the forecasting power of Standards is strongest during tightening credit periods.
    URI
    http://hdl.handle.net/1969.1/ETD-TAMU-2011-08-9851
    Subject
    predictability
    credit
    stock
    return
    volatility
    survey
    Collections
    • Electronic Theses, Dissertations, and Records of Study (2002– )
    Citation
    Park, Heungju (2011). Credit Conditions and Stock Return Predictability. Doctoral dissertation, Texas A&M University. Available electronically from http : / /hdl .handle .net /1969 .1 /ETD -TAMU -2011 -08 -9851.

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