Please rotate your device to landscape mode to view the charts.

Intermediaries and Asset Prices: International Evidence since 1870

Journal: Review of Financial Studies

Date: 20220501

Author: Baron, Matthew; Muir, Tyler

Abstract:
We study data on commercial banks and securities firms across multiple countries since 1870. Balance sheet expansion of leveraged intermediaries negatively predicts returns of stocks, bonds, currencies, and housing. The predictability is stronger at shorter horizons, is robust to macroeconomic controls, and holds outside distress periods, in contrast to models featuring nonlinearities during distress. Intermediaries in global financial centers predict international equity returns. A new data set on individual stock holdings of Japanese intermediaries since 1955 shows intermediaries affect returns of stocks directly held. Our results suggest a strong universal link between intermediaries and asset returns distinct from macroeconomic channels.

Link: Google Scholar

Key Findings

Balance Sheet Expansion Predicts Lower Returns

Asset growth of leveraged financial intermediaries (banks and securities firms) negatively predicts future returns across stocks, bonds, currencies, and housing.

Universal Pattern Across Countries

The predictability holds across the US, UK and Japan from 1870-2016, operating independently of macroeconomic cycles.

Direct Channel Effect

Asset returns are most affected when intermediaries directly hold those assets, demonstrated through analysis of Japanese stock ownership 1955-2000.

Impact of Bank Asset Growth on Returns

  • One standard deviation increase in commercial bank asset growth predicts -3.7% lower stock returns and -3.6% lower bond returns over 1 year
  • Effect strengthens over longer horizons, reaching -7.7% for stocks over 2 years
  • Predictability remains significant after controlling for macroeconomic factors

International Evidence: Financial Center Impact

  • UK bank loan growth was stronger predictor pre-1939 when London was global financial center
  • US bank loan growth became dominant predictor post-1950 as New York emerged as financial hub
  • Local loan growth in 32 countries shows significant predictability in post-1950 period

Japanese Stock Ownership Channel

  • Banks owning >5% of a stock show -38.5% lower 3-year returns during bank expansion
  • Effect stronger when bank asset growth and ownership changes move in same direction
  • Demonstrates direct transmission channel from intermediary balance sheets to asset prices

Contribution and Implications

  • First comprehensive historical evidence linking intermediary balance sheets to asset prices across multiple countries and centuries
  • Demonstrates intermediary effects operate independently of macroeconomic cycles
  • Provides support for theoretical models where intermediary constraints affect asset prices
  • Highlights importance of monitoring financial sector balance sheet expansion for asset price stability

Data Sources

  • Return prediction chart based on Table 3 Panel A regression coefficients showing impact of asset growth on future returns
  • International evidence chart constructed from Table 6 showing differential effects of UK vs US loan growth pre/post WWII
  • Japanese stock ownership visualization derived from Table 8 Panel B showing interaction between asset growth and ownership stakes