IDEAS home Printed from https://ideas.repec.org/p/wop/pennin/96-37.html

A Market-Based Risk Classification of Financial Institutions

Author

Listed:
  • Alan C. Hess
  • Kirati Laisathit

Abstract

This paper derives, estimates, and analyzes a multi-factor model of the monthly holding period returns on the stocks of exchange-traded financial institutions. In addition to bond and equity returns, the factors include default, liquidity, and term structure risk premiums plus variables that measure changes in deposit demand. To ensure that our sample has a large number of firms, we use data from January 1981 through December 1988. The equity return explains a large share of time-series variation in financial institutions' returns. The additional factors implied by banking theory have little incremental explanatory power. The two-factor model regression coefficients have considerable cross-sectional variation. This permits us to group banks into portfolios with similar risk exposures. These portfolios bear no relation to the SIC codes that group banks by their charters and lines of business. This paper was presented at the Financial Institutions Center's October 1996 conference on "

Suggested Citation

  • Alan C. Hess & Kirati Laisathit, 1996. "A Market-Based Risk Classification of Financial Institutions," Center for Financial Institutions Working Papers 96-37, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:96-37
    as

    Download full text from publisher

    File URL: http://fic.wharton.upenn.edu/fic/papers/96/9637.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
    2. 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.
    3. Edward J. Kane & Haluk Unal, 1988. "Change in Market Assessments of Deposit-Institution Riskiness," NBER Working Papers 2530, National Bureau of Economic Research, Inc.
    4. Benjamin M. Friedman & V. Vance Roley, 1985. "Aspects of Investor Behavior Under Risk," NBER Working Papers 1611, National Bureau of Economic Research, Inc.
    5. Jonathan A. Neuberger, 1991. "Risk and return in banking: evidence from bank stock returns," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 18-30.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Beverly Hirtle, 1997. "Derivatives, Portfolio Composition, and Bank Holding Company Interest Rate Risk Exposure," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 243-266, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alan Hess & Kirati Laisathit, 1997. "A Market-based Risk Classification of Financial Institutions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 133-158, October.
    2. Pariyada Sukcharoensin, 2013. "Time-Varying Market, Interest Rate and Exchange Rate Risks of Thai Commercial Banks," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 9(1), pages 25-45.
    3. Michael Isimbabi & Alan Tucker, 1997. "The market perception of banking industry risk: A multifactor analysis," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 25(1), pages 99-112, March.
    4. Marc†Gregor Czaja & Hendrik Scholz & Marco Wilkens, 2010. "Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany," European Financial Management, European Financial Management Association, vol. 16(1), pages 124-154, January.
    5. Kavussanos, Manolis G. & Marcoulis, Stelios N., 2004. "4. Cross-Industry Comparisons Of The Behaviour Of Stock Returns In Shipping, Transportation And Other Industries," Research in Transportation Economics, Elsevier, vol. 12(1), pages 107-142, January.
    6. John B. McCoy, 1994. "Bank strategies for survival and success," Proceedings 23, Federal Reserve Bank of Chicago.
    7. Xiangnan Meng & Xin Deng, 2013. "Interest Rate and Foreign Exchange Sensitivity of Bank Stock Returns: Evidence from China," Multinational Finance Journal, Multinational Finance Journal, vol. 17(1-2), pages 77-106, March - J.
    8. Joseph P. Hughes & Loretta J. Mester, "undated". "Evidence on the Objectives of Bank Managers," Rodney L. White Center for Financial Research Working Papers 4-94, Wharton School Rodney L. White Center for Financial Research.
    9. John H. Boyd & Mark Gertler, 1994. "Are banks dead? Or are the reports greatly exaggerated?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 18(Sum), pages 2-23.
    10. Jane W. D'Artista & Tom Schlesinger, 1994. "The parallel banking system," Proceedings 36, Federal Reserve Bank of Chicago.
    11. Jonathan A. Neuberger, 1992. "Bank holding company stock risk and the composition of bank asset portfolios," Economic Review, Federal Reserve Bank of San Francisco, pages 53-62.
    12. Jill L. Wetmore & John R. Brick, 1994. "Commercial Bank Risk: Market, Interest Rate, And Foreign Exchange," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(4), pages 585-596, December.
    13. Carter H. Golembe, 1994. "The (declining?) role of banking," Proceedings 14, Federal Reserve Bank of Chicago.
    14. Sean Becketti & Charles S. Morris, 1993. "Reduced form evidence on the substitutability between bank and nonbank loans," Research Working Paper 93-18, Federal Reserve Bank of Kansas City.
    15. Randall S. Kroszner & Philip E. Strahan, 1994. "Dividend behavior of financially distressed savings institutions," Proceedings 34, Federal Reserve Bank of Chicago.
    16. Larry A. Frieder & Robert B. Hedges, 1994. "Bottomline banking: regaining the lost paradigm," Proceedings 28, Federal Reserve Bank of Chicago.
    17. Allen Berger & Gregory Udell, 1994. "Lines of Credit and Relationship Lending in Small Firm Finance," Center for Financial Institutions Working Papers 94-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
    18. Rebecca Demsetz, 1994. "Evidence on the relationship between regional economic conditions and loan sales activity," Proceedings 40, Federal Reserve Bank of Chicago.
    19. Richard M. Kovacevich, 1994. "Selecting a strategy for success," Proceedings 22, Federal Reserve Bank of Chicago.
    20. James B. Thomson, 1994. "Discussion of "objectives of bank management."," Proceedings 44, Federal Reserve Bank of Chicago.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wop:pennin:96-37. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Krichel (email available below). General contact details of provider: https://edirc.repec.org/data/fiupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.