Asset Pricing with a Bank Risk Factor
48 Pages Posted: 21 Dec 2011 Last revised: 3 May 2017
Date Written: March 9, 2017
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: Suggested Citation