February 2022

Cross-Sectional Financial Conditions, Business Cycles and The Lending Channel

Thiago R.T. Ferreira


I document business cycle properties of the full cross-sectional distributions of U.S. stock returns and credit spreads from financial and nonfinancial firms. The skewness of returns of financial firms (SRF) best predicts economic activity, while being a barometer for lending conditions. SRF also affects firm-level investment beyond firms' balance sheets, and adverse SRF shocks lead to macroeconomic downturns with tighter lending conditions in vector autoregressions (VARs). These results are consistent with a lending channel in which cross-sectional financial firms' balance sheets play a prominent role in business cycles. I rationalize this argument with a model that matches the VAR evidence.

SRF monthly data (CSV) and SRF monthly data definitions (TXT) (Updated: Feburary 4, 2022)
SRF quarterly data (CSV) and SRF quarterly data definitions (TXT) (Updated: Feburary 4, 2022)

Keywords: Cross-sectional, skewness, business cycles, lending channel

DOI: https://doi.org/10.17016/IFDP.2022.1335

PDF: Full Paper

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Last Update: February 04, 2022