Bank Risk Strategies and Cyclical Variation in Bank Stock Returns

Lieven Baele (), Rudi Vander Vennet and A. van Landschoot
Additional contact information
A. van Landschoot: -

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper investigates whether the stock returns of banks with different risk profiles exhibit different risk factor sensitivities over the business cycle. More specifically, we investigate whether or not high levels of capital adequacy or functional diversification provide banks with a structural hedge against a deterioration in the prevailing credit market conditions. Based on recent imperfect capital market theories, we develop a number of theoretical arguments for the existence of asymmetries in systematic risk across various types of banks. We use a regime-switching model to test the theoretical hypotheses empirically on a sample of European listed banks. We find that bank stock returns are strongly asymmetric; both the sensitivity to shocks and the conditional volatility are higher during business cycle troughs. Better capitalized and functionally diversified banks are perceived by investors as being better protected against a deterioration in credit market conditions compared to their relatively less capitalized and more specialized competitors.

Pages: 53 pages
Date: 2004-01
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://wps-feb.ugent.be/Papers/wp_04_217.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:04/217

Access Statistics for this paper

More papers in Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration Contact information at EDIRC.
Bibliographic data for series maintained by Nathalie Verhaeghe ().