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Size Anomalies in U.S. Bank Stock Returns: A Fiscal Explanation

  • Priyank Gandhi
  • Hanno Lustig

The largest commercial bank stocks, ranked by total size of the balance sheet, have significantly lower risk-adjusted returns than small- and medium-sized bank stocks, even though large banks are significantly more levered. We uncover a size factor in the component of bank returns that is orthogonal to the standard risk factors, including small-minus-big, which has the right covariance with bank returns to explain the average risk-adjusted returns. This factor measures size-dependent exposure to bank-specific tail risk. These findings are consistent with government guarantees that protect shareholders of large banks, but not small banks, in disaster states.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16553.

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Date of creation: Nov 2010
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Publication status: published as Size Anomalies in Bank Stock Returns (joint with Priyank Gandhi), forthcoming in Journal of Finance.
Handle: RePEc:nbr:nberwo:16553
Note: AP CF PE
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