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The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data

  • Christian Calmès


    (Département des sciences administratives, Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle, ESG-UQAM)

  • Raymond Théoret


    (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM)

This paper revisits the impact of off-balance-sheet (OBS) activities on banks risk-return trade-off. Recent studies (e.g., Stiroh and Rumble 2006) suggest that increasing OBS activities do not necessarily yield straightforward diversification benefits for banks. However, introducing a risk premium in the standard banks returns models, and resorting to an ARCH-M procedure, Canadian data suggest that banks risk-return trade-off displays a structural break around 1997. In the second subperiod of our sample (1997-2007), we find that the noninterest income generated by OBS activities no longer impacts banks returns negatively. While during the first period (1988-1996) the volatility variable is not significant in any returns equations, a risk premium eventually emerged, pricing the risk associated to OBS activities risks.

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Paper provided by Département des sciences administratives, UQO in its series RePAd Working Paper Series with number UQO-DSA-wp032009.

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Length: 37 pages
Date of creation: 12 Aug 2009
Date of revision:
Handle: RePEc:pqs:wpaper:032009
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