Size Anomalies in U.S. Bank Stock Returns
51 Pages Posted: 5 Aug 2010 Last revised: 13 Nov 2014
Date Written: August 15, 2012
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
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