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Bank stock returns, leverage and the business cycle

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  • Jing Yang
  • Kostas Tsatsaronis

Abstract

The returns on bank stocks rise and fall with the business cycle, making bank equity financing cheaper in the boom and dearer during a recession. This provides support for prudential tools that give incentives for banks to build capital buffers at times when the cost of equity is lower. In addition, banks with higher leverage face a higher cost of equity, which suggests that higher capital ratios are associated with lower funding costs.

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Bibliographic Info

Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2012)
Issue (Month): (March)
Pages:

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Handle: RePEc:bis:bisqtr:1203g

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  1. Malkiel, Burton & Campbell, John & Lettau, Martin & Xu, Yexiao, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Scholarly Articles 3128707, Harvard University Department of Economics.
  2. David Miles & Jing Yang & Gilberto Marcheggiano, 2013. "Optimal Bank Capital," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 123(567), pages 1-37, 03.
  3. Da, Zhi & Guo, Re-Jin & Jagannathan, Ravi, 2012. "CAPM for estimating the cost of equity capital: Interpreting the empirical evidence," Journal of Financial Economics, Elsevier, Elsevier, vol. 103(1), pages 204-220.
  4. Francisco Covas & Wouter J. Den Haan, 2011. "The Cyclical Behavior of Debt and Equity Finance," American Economic Review, American Economic Association, American Economic Association, vol. 101(2), pages 877-99, April.
  5. Choe, Hyuk & Masulis, Ronald W. & Nanda, Vikram, 1993. "Common stock offerings across the business cycle : Theory and evidence," Journal of Empirical Finance, Elsevier, Elsevier, vol. 1(1), pages 3-31, June.
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Cited by:
  1. Jaromir Benes & Michael Kumhof & Douglas Laxton, 2014. "Financial Crises in DSGE Models: Selected Applications of MAPMOD," IMF Working Papers 14/56, International Monetary Fund.

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