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Asset pricing with a bank risk factor

  • João Pedro Pereira
  • António Rua

This paper studies how the state of the banking sector influences stock returns of nonfinancial firms. We consider a two-factor pricing model, where the first factor is the traditional market excess return and the second factor is the change in the average distance to default of the banking sector. We find that this bank factor is priced in the cross section of U.S. nonfinancial firms. Controlling for market beta, the expected excess return for a stock in the top quintile of bank risk exposure is on average 2.67% higher than for a stock in the bottom quintile.

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File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/wp201202.pdf
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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201202.

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Date of creation: 2012
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Handle: RePEc:ptu:wpaper:w201202
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  1. Jan Ericsson, 2005. "Estimating Structural Bond Pricing Models," The Journal of Business, University of Chicago Press, vol. 78(2), pages 707-735, March.
  2. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2006. "In Search of Distress Risk," NBER Working Papers 12362, National Bureau of Economic Research, Inc.
  3. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.
  4. Doron Avramov & Tarun Chordia & Gergana Jostova & Alexander Philipov, 2007. "Momentum and Credit Rating," Journal of Finance, American Finance Association, vol. 62(5), pages 2503-2520, October.
  5. Sudheer Chava & Amiyatosh Purnanandam, 2010. "Is Default Risk Negatively Related to Stock Returns?," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2523-2559, June.
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