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Real estate as a common risk factor in bank stock returns

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  • Carmichael, Benoît
  • Coën, Alain

Abstract

This article investigates the potential role of real estate risk in the pricing of US bank stocks from February 1990 to December 2015. Generalized method of moments estimates of conditional multifactor models are provided. The real estate risk is proxied by the return of an investment strategy that is short on low-leverage real estate investment trust (REIT) assets and long on high-leverage REIT assets. We group banks into portfolios based on their market capitalization, real estate loans as a proportion of total assets, and book-to-market ratios. The results suggest that the real estate premium is a relevant risk factor in bank stocks returns. For instance, we find that a 100-basis-point increase to the real estate premium increases returns by 15.8 to 20.1 basis points for portfolios grouped by market capitalization. This conclusion remains when other oft-cited bank risk factors are considered, including small-minus-big, high-minus-low and the return on equity of the financial sector.

Suggested Citation

  • Carmichael, Benoît & Coën, Alain, 2018. "Real estate as a common risk factor in bank stock returns," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 118-130.
    • Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:118-130
    DOI: 10.1016/j.jbankfin.2018.07.007
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    Cited by:

    1. Sing, Tien Foo & Wang, Long, 2021. "Spillovers of Non-Fundamental Risks: The Tale of Two Securitized Real Estate Markets," International Real Estate Review, Global Social Science Institute, vol. 24(2), pages 185-220.
    2. Venmans, Frank, 2021. "The leverage anomaly in U.S. bank stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    3. Carmichael, Benoît & Coën, Alain, 2020. "Real estate as a common risk factor in the financial sector: International evidence," Finance Research Letters, Elsevier, vol. 32(C).
    4. Akhtaruzzaman, Md & Chiah, Mardy & Docherty, Paul & Zhong, Angel, 2021. "Betting against bank profitability," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 304-323.
    5. Lian, Ziying & Cai, Jun & Webb, Robert I., 2020. "Oil stocks, risk factors, and tail behavior," Energy Economics, Elsevier, vol. 91(C).
    6. Yang, Huan & Cai, Jun & Huang, Lin & Marcus, Alan J., 2021. "Bank stocks, risk factors, and tail behavior," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 203-229.
    7. Martin Hauptfleisch, 2019. "Financial Decision-Making Using Data," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 6-2019.

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    More about this item

    Keywords

    Asset pricing; Real estate risk; Bank stocks; Multifactor models; GMM;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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