The Determinants of Bank Stock Returns' Co-Movements in East Asia
8 Pages Posted: 22 Aug 2008
Date Written: July 10, 2008
We examine co-movements of bank stock returns in eight East Asian countries after the 1997 crisis and attempt to determine the factors that influence them. The return correlations among banks within each country are computed and used as a dependent variable in weighted least squares regressions. The factors were chosen from a wide range of accounting and market-based indicators using a stepwise procedure. The results show that the share of interbank activities in the balance sheet does not explain the level of correlations. However, a strong link is found between the bank return co-movements and bank default risk measured by a z-score. To a lesser extent, the share of loan activities in a bank's balance sheet, which is a proxy of opacity, is also a significant factor of the level of correlation.
Keywords: Bank contagion, East Asia, Correlation of bank stock returns
JEL Classification: G21, G29
Suggested Citation: Suggested Citation