The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data

Christian Calmès () and Raymond Théoret

Journal of Banking & Finance, 2010, vol. 34, issue 7, 1719-1728

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: Regulatory; changes; Noninterest; income; Diversification; Structural; break; Shadow; banking; Risk; premium (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (47)

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Working Paper: The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:7:p:1719-1728

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