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Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms

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  • Edward J. Kane
  • Haluk Unal

Abstract

This paper decomposes both the market sensitivity and the interest-rate sensitivity of bank stock into on-balance-sheet and off-balance-sheet components. It derives these constituent and often-offsetting sensitivities from a nonstationary three-equation model that employs accounting and capital-market information to explain cross-sectional and temporal variation in the value of stockholder equity. To control statistically for heteroskedasticity and intrasample differences in unbooked capital positions, the model is estimated separately for three size classes of large U.S. banks. Parameter estimates confirm the importance of "hidden" or unbooked capital at these banks. For the nation's very largest banks, shifts in the value of these parameters are consistent with the view that the capitalized value of federal deposit-insurance guarantees burgeoned in the 1980s with interest volatility, demonstrations of regulatory forbearance, and relaxation of deposit-rate ceilings.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2693.

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Date of creation: Aug 1988
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Publication status: published as The Journal of Finance, Vol. XLV, No. 1, pp. 113-136, (March 1990).
Handle: RePEc:nbr:nberwo:2693

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  1. Lynge, Morgan J. & Zumwalt, J. Kenton, 1980. "An Empirical Study of the Interest Rate Sensitivity of Commercial Bank Returns: A Multi-Index Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(03), pages 731-742, September.
  2. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
  3. James B. Thomson, 1986. "The use of market information in pricing deposit insurance," Working Paper 8609, Federal Reserve Bank of Cleveland.
  4. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, December.
  5. George G. Kaufman, 1984. "Measuring and managing interest rate risk: A primer," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 16-29.
  6. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
  7. Brickley, James A. & James, Christopher M., 1986. "Access to deposit insurance, insolvency rules and the stock returns of financial institutions," Journal of Financial Economics, Elsevier, vol. 16(3), pages 345-371, July.
  8. Lloyd, William P. & Shick, Richard A., 1977. "A Test of Stone's Two-Index Model of Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(03), pages 363-376, September.
  9. Newey, Whitney K., 1984. "A method of moments interpretation of sequential estimators," Economics Letters, Elsevier, vol. 14(2-3), pages 201-206.
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