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Investing in crises

Author

Listed:
  • Baron, Matthew
  • Laeven, Luc
  • Pénasse, Julien
  • Usenko, Yevhenii

Abstract

We investigate asset returns around banking crises in 44 advanced and emerging economies from 1960 to 2018. In contrast to the view that buying assets during banking crises is a profitable long-run strategy, we find returns of equity and other asset classes generally underperform after banking crises. While prices are depressed during crises and partially recover after acute stress ends, consistent with theories of fire sales and intermediary-based asset pricing, we argue that investors do not fully anticipate the consequences of debt overhang, which result in lower long-run dividends. Our results on bank stock underperformance suggest that government-funded bank recapitalizations can often lead to substantial taxpayer losses. JEL Classification: G11, G14, G15, G41

Suggested Citation

  • Baron, Matthew & Laeven, Luc & Pénasse, Julien & Usenko, Yevhenii, 2021. "Investing in crises," Working Paper Series 2548, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20212548
    Note: 261593
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    References listed on IDEAS

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    1. Marfè, Roberto & Pénasse, Julien, 2024. "Measuring macroeconomic tail risk," Journal of Financial Economics, Elsevier, vol. 156(C).

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    More about this item

    Keywords

    financial crises; fire sales; investments; returns;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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