Common risk factors in bank stocks |
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Authors: | Ariel M Viale James W Kolari Donald R Fraser |
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Institution: | 1. Barry Kaye College of Business, Florida Atlantic University, 777 Glades Road, Boca Raton, FL 33431, USA;2. Mays Business School, Texas A&M University, College Station, TX 77843, USA |
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Abstract: | This paper provides evidence on the risk factors that are priced in bank equities. Alternative empirical models with precedent in the nonfinancial asset pricing literature are tested, including the single-factor CAPM, three-factor Fama–French model, and ICAPM. Our empirical results indicate that an unconditional two-factor ICAPM model that includes the stock market excess return and shocks to the slope of the yield curve is useful in explaining the cross-section of bank stock returns. However, we find no evidence that firm specific factors such as size and book-to-market ratios are priced in bank stock returns. These results have a number of important implications for the estimation of the banks’ cost of capital as well as regulatory initiatives to utilize market discipline to evaluate bank risk under Basel II. |
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Keywords: | G12 G14 G21 G28 |
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