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Common risk factors in bank stocks

  • Viale, Ariel M.
  • Kolari, James W.
  • Fraser, Donald R.

This paper provides evidence on the risk factors that are priced in bank equities. Alternative empirical models with precedent in the nonfinancial asset pricing literature are tested, including the single-factor CAPM, three-factor Fama-French model, and ICAPM. Our empirical results indicate that an unconditional two-factor ICAPM model that includes the stock market excess return and shocks to the slope of the yield curve is useful in explaining the cross-section of bank stock returns. However, we find no evidence that firm specific factors such as size and book-to-market ratios are priced in bank stock returns. These results have a number of important implications for the estimation of the banks' cost of capital as well as regulatory initiatives to utilize market discipline to evaluate bank risk under Basel II.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 3 (March)
Pages: 464-472

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:3:p:464-472
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Martin Lettau & Sydney Ludvigson, 1999. "Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying," Staff Reports 93, Federal Reserve Bank of New York.
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