Real Estate Market Risk in Bank Stock Returns: Evidence for the EU-15 Countries

56 Pages Posted: 22 Aug 2011

See all articles by António Miguel Martins

António Miguel Martins

Instituto Politécnico do Porto - CIICESI, Escola Superior de Tecnologia e Gestão de Felgueiras, Instituto Politécnico do Porto

F. Vitorino Martins

Univ. of Porto, Fac. of Economics

Ana Paula Serra

Universidade do Porto - Faculdade de Economia (FEP)

Date Written: February 5, 2011

Abstract

In countries with highly-developed financial systems bank portfolios have high exposure, directly or indirectly, to the real estate sector. Changes in the value of real estate can have a potentially significant impact on the default risk of banks and on their profitability as a result of this high exposure to the real estate sector. This scenario is especially critical during real estate crises, when bank losses tend to increase dramatically, placing the entire financial system at risk of collapse, as it was the case in the recent international subprime crisis. This article studies the sensitivity of bank stock returns to real estate returns. The results indicate that EU-15 bank stocks are sensitive to real estate returns; there is a positive relation between bank stock returns and real estate returns after controlling for general market conditions and interest rates. In particular, small banks with greater asset exposure to the real estate sector showed to be more sensitive to changes in the real estate returns.

Keywords: Real Estate, Mortgage Lending, Bank Stocks, Asset Pricing

Suggested Citation

Martins, António Miguel and Martins, F. Vitorino and Serra, Ana Paula Sousa Freitas Madureira, Real Estate Market Risk in Bank Stock Returns: Evidence for the EU-15 Countries (February 5, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1913731 or http://dx.doi.org/10.2139/ssrn.1913731

António Miguel Martins (Contact Author)

Instituto Politécnico do Porto - CIICESI, Escola Superior de Tecnologia e Gestão de Felgueiras, Instituto Politécnico do Porto ( email )

Portugal

F. Vitorino Martins

Univ. of Porto, Fac. of Economics ( email )

Rua Dr. Roberto Frias
4200-464 Porto
Portugal

Ana Paula Sousa Freitas Madureira Serra

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

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