Dissertations, Theses, and Capstone Projects

Date of Degree


Document Type


Degree Name





Sebastiano Manzan

Committee Members

Sebastiano Manzan

Christos Giannikos

Wim Vijverberg

Subject Categories

Econometrics | Finance | Macroeconomics


Bank Stock Returns, Business Cycles, Credit Growth, Factor Models, News Shocks, Variance Decomposition


This dissertation consists of three chapters that cover topics in finance and macroeconomics.

Chapter 1 - Do Credit Booms Predict U.S. Recessions?

This paper investigates the role of bank credit in predicting U.S. recessions since the 1960s in the context of a bivariate probit model. A set of results emerge. First, credit booms are shown to have strong positive effects in predicting declines in the business cycle at horizons ranging from six to nine months. Second, by isolating the effect of credit booms, I identify their contributions to recession probabilities which range between three and four percentage points at a horizon of six months. Third, the out-of-sample performance of the model is tested on the most recent credit-driven recession, the Great Recession of 2008. The model performs better than a more parsimonious version where we restrict the effect of credit booms on the business cycle in the system to be zero.

Chapter 2 - Credit Fluctuations and Neglected Crash Risk in U.S. Bank Returns

Using U.S. quarterly data from 1960, the paper studies the interaction between bank stock returns and aggregate credit fluctuations on a set of economic dimensions. I investigate the source of neglected crash risk in U.S. bank returns using a new deviation measure of aggregate loans per capita called ltd. A one standard deviation increase in ltd decreases bank stock returns by 5%, and their dividend growth by almost 6% over the following year. This variable embeds important information about both future returns (discount rate news) and cash flow growth (dividend news); yet a decomposition of future unexpected bank returns shows a higher incremental effect associated with the variance of news about the discount rate. The structure of the news is also highly dependent on the size of the financial institution with small commercial banks being more vulnerable than large ones to changes in the credit cycle. I interpret the size of neglected crash risk in the context of a regime-switching model where the outcome of a small probability of disaster can impact bank cash flows in either state exposing investors to an additional shock originating in the aggregate loan market.

Chapter 3 - News shocks across countries: An empirical investigation

We estimate the role of news shocks to total factor productivity, foreign interest rates and commodity terms of trade in explaining the variance of output and other macro aggregates in a large sample of countries. To correct for the small-sample bias of the variance decomposition estimates we develop a Bootstrap-after-Bootstrap method. We find that the mean difference of variance share of output explained by news shocks between developing and developed countries is: I) Negligible for news shocks to total factor productivity. II) Positive for news shocks to foreign interest rates (6 p.p.) and to commodity terms of trade (8.3 p.p.). Using cross-sectional data, we find that countries with less financial development have a larger share of output variance explained by news shocks to foreign interest rates, and countries with higher total trade of commodities to output ratio and less developed financial markets exhibit a larger share of output variance explained by news shocks to commodity terms of trade. These results suggest that to study the role of news shocks in the economy, one-sector models with only shocks to total factor productivity are not adequate, and that there must be a structural distinction regarding financial markets' development when modeling developing countries as opposed to developed in a general equilibrium framework.