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Buy Banking Crisis Dips?

March 22, 2021 • Posted in Investing Expertise, Volatility Effects

Is buying assets during banking crises, when assets appear to be at deep discounts, an attractive long-run strategy? In their January 2021 paper entitled “Investing in Crises”, Matthew Baron, Luc Laeven, Julien Penasse and Yevhenii Usenko investigate asset returns across several years before and after banking crises, for which they identify the onset (first month) in three ways:

  1. Systemwide banking panics (as specified in a prior paper).
  2. Multiple major government interventions (as specified in a prior paper).
  3. 30% drop in a country’s bank stock index (bank equity crash).

They test trading strategies in which a U.S. investor exploits banking crises around the world as they occur and otherwise holds U.S. Treasury bills (T-bill). They focus on bank stock and other (non-financial) stock indexes, but also consider government bonds, currencies and residential real estate. Using monthly asset index returns in both local currencies and U.S. dollars, monthly U.S. T-bill yield, crisis starting months and economic data across 44 developed and emerging market countries during 1960 through 2018, they find that: (more…)

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