Is There a Banking Risk Premium in the US Stock Market?

25 Pages Posted: 18 Jul 2010

See all articles by Liujing Zeng

Liujing Zeng

Monash University

Hue Hwa Au Yong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Sirimon Treepongkaruna

The University of Western Australia; Financial Research Network (FIRN)

Robert W. Faff

University of Queensland

Date Written: July 18, 2010

Abstract

This paper investigates whether there is a banking risk premium that helps explain the returns of US publicly listed firms. We assess this phenomenon in the context of the capital asset pricing model and the Fama and French three-factor model. We use bank size to create the banking factor – a mimicking portfolio that is long (short) big (small) banks. Our findings support a risk-based interpretation of the banking factor and that a banking risk premium is priced and systematic.

Keywords: Asset Pricing, Banking Risk Factor, Mimicking Portfolio, Bank Size

JEL Classification: G12, G21

Suggested Citation

Zeng, Liujing and Au Yong, Hue Hwa and Treepongkaruna, Sirimon and Faff, Robert W., Is There a Banking Risk Premium in the US Stock Market? (July 18, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1644865 or http://dx.doi.org/10.2139/ssrn.1644865

Liujing Zeng

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Hue Hwa Au Yong

Monash University - Department of Banking and Finance ( email )

PO Box 197
Caulfield East, Victoria 3145
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Sirimon Treepongkaruna

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia
+61864887853 (Phone)
+61864881086 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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