Bank Stock Returns under Money Supply Endogeneity: Empirical Evidence Using Panel Data
September 21, 2009
22nd Australasian Finance and Banking Conference 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.
Number of Pages in PDF File: 54
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
Date posted: October 27, 2009