Risk-return Portfolio Level Trade-off for Czech Banks

Pavel Jankulár

Prague Economic Papers, 2024, vol. 2024, issue 2, 187-219

Abstract: This paper examines the validity of the risk-return trade-off for a sample of Czech banks over the period 2002-2022 by analysing the relationship between the bank risk and risk-adjusted returns. I find evidence of a significant negative association between the regulatory risk measure and risk-adjusted returns, indicating that the risk-return trade-off does not hold. Specifically, a 100 bps increase in the risk is associated with about a 7 bps decrease in the return on risk-adjusted assets (RORWA) and an 11 bps decrease in the risk-adjusted net interest margin (rNIM) in the short run. The long-run effect is about double for RORWA and almost triple for rNIM. I also find evidence that during the period of low interest rates, the effect for RORWA was about a half smaller, albeit still negative. On the contrary, when non-regulatory measures of risk or risk-adjusted profitability are used, the risk-return trade-off seems to hold.

Keywords: bank profitability; bank risk; risk-return trade-off; RORWA; RAROC; dynamic panel regression (search for similar items in EconPapers)
JEL-codes: C33 D01 G11 G14 G21 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.18267/j.pep.859

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