The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data

Christian Calmès () and Raymond Théoret ()
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Raymond Théoret: Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM

No UQO-DSA-wp032009, RePAd Working Paper Series from Département des sciences administratives, UQO

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) suggest that increasing OBS activities do 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 emerged, pricing the risk associated to OBS activities risks.

Keywords: Regulatory changes; Noninterest income; Diversification; Structural break; Risk premium. (search for similar items in EconPapers)
JEL-codes: G20 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-pke and nep-reg
Date: 2009-08-12
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Persistent link: http://EconPapers.repec.org/RePEc:pqs:wpaper:032009

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