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Re-examining the risk--return relationship in banks using quantile regression

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  • Ming-Yuan Leon Li

Abstract

Financial data for the US banks listed during 2001--2007 are analysed to re-examine the risk--return relationship in the banking industry. A key feature of this study is the analysis of the changing distribution of return on equity across banks and over time by the quantile regression (hereafter QR) model and a meaningful comparative analysis with the results of the ordinary least squares estimates is examined. The following conclusions are drawn from the empirical results. First, while a positive risk--return relationship is presented for the profitable banks, the risk--return relationship is negative for the profitless banks. Second, the ‘V’ shape relationship between bank risk and profitability identified by this study could satisfactorily explain the existing risk--return puzzle among the prior empirical studies.

Suggested Citation

  • Ming-Yuan Leon Li, 2008. "Re-examining the risk--return relationship in banks using quantile regression," The Service Industries Journal, Taylor & Francis Journals, vol. 30(11), pages 1871-1881, October.
    • Handle: RePEc:taf:servic:v:30:y:2008:i:11:p:1871-1881
    DOI: 10.1080/02642060802626865
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    References listed on IDEAS

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    1. Robert F. Engle & Simone Manganelli, 2004. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 367-381, October.
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