Asset Pricing with a Bank Risk Factor

48 Pages Posted: 21 Dec 2011 Last revised: 3 May 2017

See all articles by João Pedro Pereira

João Pedro Pereira

Nova School of Business and Economics

Antonio Rua

Bank of Portugal - Economic Research Department

Date Written: March 9, 2017

Abstract

This paper studies how the state of the banking sector influences stock returns of nonfinancial firms. We consider a two-factor pricing model, where the first factor is the traditional market excess return and the second factor is the change in the average distance to default of commercial banks. We find that this bank factor is priced in the cross-section of U.S. nonfinancial firms. Controlling for market beta, the expected excess return for a stock in the top quintile of bank risk exposure is on average 2.83% higher than for a stock in the bottom quintile.

Keywords: asset pricing, factor model, distance to default, banking

JEL Classification: G12, G21

Suggested Citation

Pereira, João Pedro S.S. and Rua, Antonio, Asset Pricing with a Bank Risk Factor (March 9, 2017). Available at SSRN: https://ssrn.com/abstract=1975249 or http://dx.doi.org/10.2139/ssrn.1975249

João Pedro S.S. Pereira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Antonio Rua

Bank of Portugal - Economic Research Department ( email )

R. do Ouro, 27
Lisboa, 1100-150
Portugal

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