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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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Handle: RePEc:nbr:nberwo:16553

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Cited by:
  1. Rüdiger Fahlenbrach & Robert Prilmeier & René M. Stulz, 2011. "This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance During the Recent Financial Crisis," NBER Working Papers 17038, National Bureau of Economic Research, Inc.
  2. Stijn Van Nieuwerburgh & Hanno Lustig & Bryan Kelly, 2011. "Too-Systemic-To-Fail: What Option Markets Imply About Sector-wide Government Guarantees," 2011 Meeting Papers 1285, Society for Economic Dynamics.
  3. International Monetary Fund, 2012. "Quantifying Structural Subsidy Values for Systemically Important Financial Institutions," IMF Working Papers 12/128, International Monetary Fund.
  4. 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.).

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