Size Anomalies in U.S. Bank Stock Returns

51 Pages Posted: 5 Aug 2010 Last revised: 13 Nov 2014

See all articles by Priyank Gandhi

Priyank Gandhi

Rutgers Business School, Newark and New Brunswick

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: August 15, 2012

Abstract

The largest commercial bank stocks, ranked by the total size of the balance sheet, have significantly lower risk-adjusted returns than small- and medium-sized bank stocks, even though large banks are significantly more levered. We uncover a size factor in the component of bank returns that is orthogonal to the standard risk factors, including small-minus-big, which has the right covariance with bank returns to explain the average risk-adjusted returns. This factor measures size-dependent exposure to bank-specific tail risk. These findings are consistent with the existence of government guarantees that protect shareholders of large banks, but not small banks, in disaster states.

Keywords: Banking Crisis, Banking, Government Bailout

Suggested Citation

Gandhi, Priyank and Lustig, Hanno N., Size Anomalies in U.S. Bank Stock Returns (August 15, 2012). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1653083 or http://dx.doi.org/10.2139/ssrn.1653083

Priyank Gandhi

Rutgers Business School, Newark and New Brunswick ( email )

111 Washington Avenue
Newark, NJ 07102
United States

Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

Stanford GSB
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Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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