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Size Anomalies in U.S. Bank Stock Returns: A Fiscal Explanation

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  • Priyank Gandhi
  • Hanno Lustig

Abstract

The largest commercial bank stocks, measured by book value, have significantly lower risk-adjusted returns than small- and medium-sized bank stocks, even though large banks are significantly more levered. We find a size factor in the component of bank returns that is orthogonal to the standard risk factors. This size factor, which has the right covariance with bank returns to explain the average risk-adjusted returns, measures size-dependent exposure in banks to bank-specific tail risk. The variation in exposure can be attributed to differences in the financial disaster recovery rates between small and large banks. A general equilibrium model with rare bank disasters can match these alphas in a sample without disasters provided that the difference in disaster recovery rates between the largest and smallest banks is 35 cents per dollar of dividends.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16553.

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Date of creation: Nov 2010
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Publication status: published as Size Anomalies in Bank Stock Returns (joint with Priyank Gandhi), forthcoming in Journal of Finance.
Handle: RePEc:nbr:nberwo:16553

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Cited by:
  1. Fahlenbrach, Rudiger & Prilmeier, Robert & Stulz, Rene M., 2011. "This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis," Working Paper Series 2011-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. William B. English & Skander J. Van den Heuvel & Egon Zakrajsek, 2012. "Interest rate risk and bank equity valuations," Finance and Economics Discussion Series 2012-26, Board of Governors of the Federal Reserve System (U.S.).
  3. Bryan T. Kelly & Hanno Lustig & Stijn Van Nieuwerburgh, 2011. "Too-Systemic-To-Fail: What Option Markets Imply About Sector-wide Government Guarantees," NBER Working Papers 17149, National Bureau of Economic Research, Inc.
  4. International Monetary Fund, 2012. "Quantifying Structural Subsidy Values for Systemically Important Financial Institutions," IMF Working Papers 12/128, International Monetary Fund.
  5. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2013. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2013_23, Max Planck Institute for Research on Collective Goods.

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