Common risk factors in bank stocks

Ariel Viale, James W. Kolari and Donald R. Fraser

Journal of Banking & Finance, 2009, vol. 33, issue 3, 464-472

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.

Keywords: Asset; pricing; Bank; stocks; Regulatory; policy (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (60)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:3:p:464-472

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