Margin Credit and Stock Return Predictability

Deuskar, P and Kumar, N and Poland, J (2017) Margin Credit and Stock Return Predictability. Working Paper. SSRN.

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Abstract

Margin credit, the excess debt capacity of investors buying securities on the margin, predicts lower aggregate stock returns, outperforming other forecasting variables proposed in the literature. Its out-of-sample R-squared of 7.5% at the monthly horizon is more than twice that of the next best predictor. A margin-credit-strategy generates a Sharpe ratio of 0.95 and 1.28 in expansions and recessions, respectively. Margin credit carries information about future discount rates and cash flows. It anticipates lower future dividend, earnings, and GDP growth and higher future risk measured by higher VIX, average equity correlation, macro, and financial uncertainty, and lower intermediary equity ratio.

Affiliation: Indian School of Business
ISB Creators:
ISB CreatorsORCiD
Deuskar, PUNSPECIFIED
Kumar, NUNSPECIFIED
Poland, JUNSPECIFIED
Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Aggregate returns, Margin debt, Stock return Predictability, S&P 500 predictability, Market timing, Asset allocation
Subjects: Finance
Depositing User: Ilayaraja M
Date Deposited: 19 May 2019 14:08
Last Modified: 19 May 2019 14:08
URI: http://eprints.exchange.isb.edu/id/eprint/1018
Publisher URL: http://dx.doi.org/10.2139/ssrn.2820135
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