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Research

Credit Cycles and Asset Returns

The Leverage Factor: Credit Cycles and Asset Returns
  • Investor experience and academic research since the global financial crisis reflects a growing realization that credit conditions can affect future macroeconomic outcomes. 
  • We investigate whether credit booms throughout history have had any explanatory power to account for future asset class returns. 
  • We find that credit booms tend to systematically predict poor returns in the near future for equities, both in absolute terms and relative to bonds.
  • Investors who 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 with other well-established signals such as momentum and value.

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