Bank Holding Company Risk from 1976–1989 with a Two-Factor Model

This paper employs a two-factor model of security returns to investigate the intertemporal risk of bank holding company stock returns over the 1976–1989 period. Uniquely, the two-factor model is estimated in separate regressions for each of the fourteen years between 1976 and 1989, thus exposing intertemporal changes in the model coefficients. The results show that bank holding companies have increased in risk over the sample period and also reveal that much of the controversy over the two-index model stems from the transitory nature of the interest rate coefficient through time, making long time series groupings of data misspecified. The above holds for both short-term and long-term interest rates. Interest rates have little impact on bank returns.