Shadow banks, leverage risks, and asset prices

Xu Feng, Lei Lu, Yajun Xiao*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)


Trust companies generate leverage cycle dynamics by intermediating less regulated credit to the financial markets in China. We find that the leverage factor constructed from trust companies can explain the time-series and cross-sectional asset returns. The leverage factor derived from securities companies does not possess the same explanatory power, despite these companies being legitimate financing sources of leveraged investment. Our results provide new evidence that the financial innovations created by shadow banks significantly amplify leverage in less sophisticated financial markets. This not only affects financial fragility, but also determines asset prices.

Original languageEnglish
Article number103816
JournalJournal of Economic Dynamics and Control
Publication statusPublished - Feb 2020
Externally publishedYes


  • Bank-trust cooperation
  • Intermediary asset pricing
  • Leverage factor


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