Bank Stock Returns under Money Supply Endogeneity: Empirical Evidence Using Panel Data

54 Pages Posted: 27 Oct 2009

Date Written: September 21, 2009


There is as yet a study of money supply effect on the aggregate bank stock prices using modern money supply theories.Endogenous money theory suggests loans made by banks cause deposits, and, consequently, bank creates money supply. Resulting changes in bank’s loans and deposits affects bank stock returns: Also, consequent credit creations/reductions affect a bank’s profitability, thus stock prices. Whether money endogeneity is in fact the way the money supply behaves has also not yet been widely tested. Applying panel regression and generalized method of moments, this paper provides new evidence on this little explored relationship between endogenous money supply theory and bank stock returns by testing across several major economies (G-7 countries). We do this by controlling for the actual monetary policy regimes in the economies. The results, while confirming the money endogeneity as a proposition, also shows significant money supply effect on the aggregate prices of banking shares.

Keywords: Bank share prices, Money endogeneity, Money supply effect, Bank credit, Monetary regime effect, G-7 countries, Panel data regression

JEL Classification: E12, E51, G21

Suggested Citation

Ariff, Mohamed, Bank Stock Returns under Money Supply Endogeneity: Empirical Evidence Using Panel Data (September 21, 2009). 22nd Australasian Finance and Banking Conference 2009, Available at SSRN: or

Mohamed Ariff (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
61755952296 (Phone)
61755951160 (Fax)


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