Working Paper: When credit expansions become troublesome: The story of investor sentiments

Working Paper - April 2023 - No. 194

Authors Gerba, Eddie (Bank of England); Leiva Leon, Danilo (ECB); Poeschl, Johannes
Subject Models; Lending
Type Working paper
Year 2023
Published 13 April 2023
Abstract icon We decompose fluctuations in stock prices into fundamental and noise shocks and estimate their effects on credit. Both shocks lead to a credit expansion, but only a noise shock results in a reversal if the anticipated shock fails to realise. A novel debt overhang channel is important for the propagation of noise shocks.