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The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data
Authors:Christian Calmè  s,Raymond Thé  oret
Affiliation:1. Chaire d’information financière et organisationnelle, École des sciences de la gestion (UQAM), Université du Québec (Outaouais), 101 St. Jean Bosco, Gatineau, Québec, Canada J8X 3X7;2. Chaire d’information financière et organisationnelle, École des sciences de la gestion (UQAM), Université du Québec (Montréal), 315 Ste. Catherine, Montréal, Québec, Canada H2X 3X2
Abstract:This paper revisits the impact of off-balance-sheet (OBS) activities on banks risk-return trade-off. Recent studies (e.g., Stiroh and Rumble, 2006) show that increasing OBS activities does not necessarily yield straightforward diversification benefits for banks. However, introducing a risk premium in the standard banks returns models, and resorting to an ARCH-M procedure, Canadian data suggest that banks risk-return trade-off displays a structural break around 1997. In the second subperiod of our sample (1997–2007), we find that the noninterest income generated by OBS activities no longer impacts banks returns negatively. While during the first period (1988–1996) the volatility variable is not significant in any returns equations, a risk premium eventually emerges, pricing the risk associated to OBS activities.
Keywords:G20   G21
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