Common factors and balance sheet structure of major European banks
This paper explores the relationship between listed European banks' fundamental characteristics and the riskiness of their stock returns. Banks' structural characteristics are measured through a number different balance sheet indicators which are then associated to the stock riskiness, as measured by the factor loadings on fundamentalfactors affecting the stock market at large. The results seem to indicate that, in the 1999-2002 period, in which the banks considered were traded in Euro, the factorloading against the market factor and against the default spread may be systematically related to banks' fundamental characteristics like asset quality indicators (especially reserves for bad loans over loans), to the composition of income (share of interest and commission revenue), and to a general indicator of bank efficiency such as the cost-income ratio. These results are broadly consistent with an option-based theory of bankvaluation, which would predict more variability in the price of bank stocks whenbanks hold riskier assets and economic conditions are poor.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
- Brewer, Elijah, III & Jackson, William E, III & Moser, James T, 1996.
"Alligators in the Swamp: The Impact of Derivatives on the Financial Performance of Depository Institutions,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 28(3), pages 482-97, August.
- Elijah Brewer & William E. Jackson & James T. Moser, 1996. "Alligators in the swamp: the impact of derivatives on the financial performance of depository institutions," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 482-501.
- Elijah Brewer, III & William E. Jackson, III & James T. Moser, 1996. "Alligators in the swamp: the impact of derivatives on the financial performance of depository institutions," Working Paper Series, Issues in Financial Regulation WP-96-6, Federal Reserve Bank of Chicago.
- Josef Lakonishok & Robert W. Vishny & Andrei Shleifer, 1993.
"Contrarian Investment, Extrapolation, and Risk,"
NBER Working Papers
4360, National Bureau of Economic Research, Inc.
- Josef Lakonishok & Andrei Shleifer & Robert W. Vishny, 1993. "Contrarian Investment, Extrapolation, and Risk," University of Chicago - George G. Stigler Center for Study of Economy and State 84, Chicago - Center for Study of Economy and State.
- Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
- Harald A. Benink & Christian C. P. Wolffe, 1998.
"Survey data and the interest rate sensitivity of U.S. bank stock returns,"
604, Federal Reserve Bank of Chicago.
- H. A. Benink & C. C. P. Wolff, 2000. "Survey Data and the Interest Rate Sensitivity of US Bank Stock Returns," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(2), pages 201-213, 07.
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- He, Jia & Ng, Lilian K, 1994. "Economic Forces, Fundamental Variables, and Equity Returns," The Journal of Business, University of Chicago Press, vol. 67(4), pages 599-609, October.
- Merton, Robert C, 1978.
"On the Cost of Deposit Insurance When There Are Surveillance Costs,"
The Journal of Business,
University of Chicago Press, vol. 51(3), pages 439-52, July.
- Merton, Robert C., 1977. "On the cost of deposit insurance when there are surveillance costs," Working papers 903-77., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Mark J. Flannery & Aris A. Protopapadakis, 2002. "Macroeconomic Factors Do Influence Aggregate Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 751-782.
- Cebenoyan, A. Sinan & Strahan, Philip E., 2004. "Risk management, capital structure and lending at banks," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 19-43, January.
- Rogers, Kevin & SinkeyJr., Joseph F., 1999. "An analysis of nontraditional activities at U.S. commercial banks," Review of Financial Economics, Elsevier, vol. 8(1), pages 25-39, June.
- Vander Vennet, Rudi, 2002. "Cost and Profit Efficiency of Financial Conglomerates and Universal Banks in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 254-82, February.
- Brewer, Elijah III & Jackson, William III & Mondschean, Thomas S., 1996. "Risk, regulation, and S & L diversification into nontraditional assets," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 723-744, May.
- Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
- 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.
- McElroy, Marjorie B & Burmeister, Edwin, 1988. "Arbitrage Pricing Theory as a Restricted Nonlinear Multivariate Regression Model: Iterated Nonlinear Seemingly Unrelated Regression Estimates," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(1), pages 29-42, January.
- Grammatikos, Theoharry & Saunders, Anthony, 1990.
"Additions to bank loan-loss reserves : Good news or bad news?,"
Journal of Monetary Economics,
Elsevier, vol. 25(2), pages 289-304, March.
- Theoharry Grammatikos & Anthony Saunders, 1988. "Additions to bank loan-loss reserves: good news or bad news?," Working Papers 89-7, Federal Reserve Bank of Philadelphia.
- Rosenberg, Barr & McKibben, Walt, 1973. "The Prediction of Systematic and Specific Risk in Common Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(02), pages 317-333, March.
- Cooper, Michael J. & Jackson, William III & Patterson, Gary A., 2003. "Evidence of predictability in the cross-section of bank stock returns," Journal of Banking & Finance, Elsevier, vol. 27(5), pages 817-850, May.
- Rosenberg, Barr, 1974. "Extra-Market Components of Covariance in Security Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(02), pages 263-274, March.
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
When requesting a correction, please mention this item's handle: RePEc:psl:bnlaqr:2006:21. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carlo D'Ippoliti)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.