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Bank exposure to market fear

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  • Chira, Inga
  • Madura, Jeff
  • Viale, Ariel M.

Abstract

We find that increases in implied market volatility (a proxy for market fear) have a significant impact on returns of bank stocks, above and beyond systematic risk proxied by the expected excess market return during a bad economic regime. Large bank returns are favorably affected by increases in implied market volatility during the crisis, while small banks are adversely affected by increases in implied market volatility. We attribute the different effects among the size-categorized bank portfolios to the perception that large banks are protected by too-big-to-fail policies. Within the sample of small banks, the adverse share price response to increased implied market volatility is more pronounced for banks that rely more heavily on non-traditional sources of funds, use a high proportion of loans in their assets, have a higher level of non-performing assets, and have a relatively low provision for loan losses. The adverse effect of negative innovations in implied market volatility on small bank returns during the crisis is primarily driven by exposure of their loan portfolio to weak economic conditions.

Suggested Citation

  • Chira, Inga & Madura, Jeff & Viale, Ariel M., 2013. "Bank exposure to market fear," Journal of Financial Stability, Elsevier, vol. 9(4), pages 451-459.
  • Handle: RePEc:eee:finsta:v:9:y:2013:i:4:p:451-459 DOI: 10.1016/j.jfs.2013.06.004
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    Cited by:

    1. Paolo Giudici & Shatha Hashem, 2015. "Systemic risk of Islamic Banks," DEM Working Papers Series 103, University of Pavia, Department of Economics and Management.
    2. Félix, Luiz & Kräussl, Roman & Stork, Philip, 2016. "The 2011 European short sale ban: A cure or a curse?," Journal of Financial Stability, Elsevier, pages 115-131.
    3. Ferreira Filipe, Sara & Grammatikos, Theoharry & Michala, Dimitra, 2016. "Pricing default risk: The good, the bad, and the anomaly," Journal of Financial Stability, Elsevier, pages 190-213.
    4. Bessler, Wolfgang & Kurmann, Philipp, 2014. "Bank risk factors and changing risk exposures: Capital market evidence before and during the financial crisis," Journal of Financial Stability, Elsevier, pages 151-166.

    More about this item

    Keywords

    Banks; Implied market volatility; Market fear;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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