Working Paper: When credit expansions become troublesome: The story of investor sentiments
Working Paper - April 2023 - No. 194
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.