Asset pricing with a bank risk factor

António Rua and João Pedro Pereira

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: This paper studies how the state of the banking sector influences stock returns of nonfinancial firms. We consider a two-factor pricing model, where the first factor is the traditional market excess return and the second factor is the change in the average distance to default of the banking sector. We find that this bank factor is priced in the cross section of U.S. nonfinancial firms. Controlling for market beta, the expected excess return for a stock in the top quintile of bank risk exposure is on average 2.67% higher than for a stock in the bottom quintile.

JEL-codes: G12 G21 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201202

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