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An international comparison of banks' equity returns

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  • Kathryn L. Dewenter
  • Alan C. Hess

Abstract

This paper tests implications of banking theory and legal theory for cross-country differences in banks' equity betas and returns. Banking theory predicts different risk exposures between transactional banks, found in the United States, the United Kingdom, Australia and Canada, and relationship banks, found in Japan, Germany, Switzerland, and the Netherlands. The authors find strong empirical support for banking theory's prediction of different risks and returns between transactional and relationship banks. Legal theory predicts that differences in banks' equity risks depend on the nature of the legal system for protecting the interests of outside investors. The authors find mixed evidence that banks' returns may vary by the type of legal system.
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Suggested Citation

  • Kathryn L. Dewenter & Alan C. Hess, 1998. "An international comparison of banks' equity returns," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 472-499.
  • Handle: RePEc:fip:fedcpr:y:1998:i:aug:p:472-499
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    References listed on IDEAS

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    1. Bruce D. Smith, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 93-105.
    2. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    3. Schreft, Stacey L. & Smith, Bruce D., 2000. "The evolution of cash transactions: Some implications for monetary policy," Journal of Monetary Economics, Elsevier, pages 97-120.
    4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    5. Greenwood, Jeremy & Smith, Bruce D., 1997. "Financial markets in development, and the development of financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 145-181, January.
    6. Bruce Smith & J. Bhattacharya & Mark Guzman, 1998. "Some Even More Unpleasant Monetarist Arithmetic," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 596-623, August.
    7. Smith, Bruce D, 1994. "Efficiency and Determinacy of Equilibrium under Inflation Targeting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 327-344.
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    Citations

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    Cited by:

    1. L. Baele & R. Vander Vennet & A. Van Landschoot, 2004. "Bank Risk Strategies and Cyclical Variation in Bank Stock Returns," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/217, Ghent University, Faculty of Economics and Business Administration.
    2. Kho, Bong-Chan & Stulz, Rene M., 2000. "Banks, the IMF, and the Asian crisis," Pacific-Basin Finance Journal, Elsevier, vol. 8(2), pages 177-216, May.
    3. Sayuri Shirai, 2001. "Searching for New Regulatory Frameworks for the Intermediate Financial Structure in Post-Crisis Asia," Center for Financial Institutions Working Papers 01-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
    4. Kutan, Ali M. & Murado─člu, Yaz G., 2016. "Financial and real sector returns, IMF-related news, and the Asian crisis," Finance Research Letters, Elsevier, vol. 16(C), pages 28-37.
    5. Peik Granlund, 2004. "Economic evaluation of bank exit regimes in US, EU and Japanese financial centres," Finance 0405002, EconWPA.
    6. Baele, Lieven & De Bruyckere, Valerie & De Jonghe, Olivier & Vander Vennet, Rudi, 2015. "Model uncertainty and systematic risk in US banking," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 49-66.
    7. repec:eee:quaeco:v:66:y:2017:i:c:p:302-313 is not listed on IDEAS
    8. R. Vander Vennet & O. De Jonghe & L. Baele, 2004. "Bank risks and the business cycle," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/264, Ghent University, Faculty of Economics and Business Administration.
    9. Granlund, Peik, 2003. "Economic evaluation of bank exit regimes in US, EU and Japanese financial centres," Research Discussion Papers 5/2003, Bank of Finland.
    10. Al-Jarhi, Mabid, 2004. "The Philosophy of Islamic Banking and Finance," MPRA Paper 66739, University Library of Munich, Germany, revised 2007.

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    Keywords

    Bank stocks;

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