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Is there a Banking Risk Premium in the US Stock Market?

Liujing Zeng, Hue Hwa Au Yong, Sirimon Treepongkaruna and Robert Faff

Journal of Financial Management, Markets and Institutions, 2014, issue 1, 27-42

Abstract: This paper investigates whether there is a banking risk premium that helps explain the returns of US publicly listed firms. We assess this research question in the context of the CAPM and the Fama-French three-factor model. We use bank size to create the banking factor return (BNK) - the return on a mimicking portfolio that is long (short) big (small) banks. We find a positive premium for BNK and our analysis supports a risk-based interpretation, since the premium is priced. Our findings are notable since they point to a slight superiority of CAPM augmented by BNK over the counterpart that augments the Fama-French model with BNK.

Keywords: Asset Pricing; Banking Risk Factor; Mimicking Portfolio; Bank Size. (search for similar items in EconPapers)
Date: 2014
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Handle: RePEc:mul:jdp901:doi:10.12831/77235:y:2014:i:1:p:27-42