Josh Davis, Alan M. Taylor, 02 January 2020

Investor experience and academic research since the Global Crisis reflects a growing realisation that credit conditions can affect future macroeconomic outcomes. This column investigates whether credit booms throughout history have had any explanatory power to account for future asset class returns. It finds that credit booms tend to systematically predict poor returns in the near future for equities in absolute terms, and relative to bonds. An investor who had tilted their portfolio allocations based on a credit boom signal would have been able to improve portfolio performance. The contribution of the credit boom signal is meaningful when compared to other well-established signals such as momentum and value.

Yusuf Soner Baskaya, Julian di Giovanni, Sebnem Kalemli-Ozcan, Mehmet Fatih Ulu, 01 September 2017

Most models assume capital flows are endogenous to the business cycle, and that inflows increase during an economy’s ‘boom’ periods. This column shows that the international no-arbitrage condition in fact does not hold, and that capital flows are pushed into an economy due to high global risk appetite. Controlling for domestic monetary policy responses to capital flows and changes in the exchange rate, exogenous capital inflows lower real borrowing costs and fuel credit expansion.

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