Bank Exposure to Market Fear

34 Pages Posted: 11 Jul 2013

See all articles by Inga Chira

Inga Chira

California State University- Northridge

Jeff Madura

Florida Atlantic University - College of Business

Ariel M. Viale

Florida Atlantic University

Date Written: July 11, 2013

Abstract

We find that increases in implied market volatility (a proxy for market fear) have a significant impact on returns of bank stocks, above and beyond systematic risk proxied by the expected excess market return during a bad economic regime. Large bank returns are favorably affected by increases in implied market volatility during the crisis, while small banks are adversely affected by increases in implied market volatility. We attribute the different effects among the size-categorized bank portfolios to the perception that large banks are protected by too-big-to-fail policies. Within the sample of small banks, the adverse share price response to increased implied market volatility is more pronounced for banks that rely more heavily on non-traditional sources of funds, use a high proportion of loans in their assets, have a higher level of non-performing assets, and have a relatively low provision for loan losses. The adverse effect of negative innovations in implied market volatility on small bank returns during the crisis is primarily driven by exposure of their loan portfolio to weak economic conditions.

Keywords: banks, implied market volatility, market fear

JEL Classification: G21

Suggested Citation

Chira, Inga and Madura, Jeff and Viale, Ariel M., Bank Exposure to Market Fear (July 11, 2013). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2292304

Inga Chira (Contact Author)

California State University- Northridge ( email )

Jeff Madura

Florida Atlantic University - College of Business ( email )

University Tower
220 SE 2 Avenue
Fort Lauderdale, FL 33301
United States
(954)762-5632 (Phone)
(954)762-5245 (Fax)

Ariel M. Viale

Florida Atlantic University ( email )

777 Glades Road
Boca Raton, FL 33431
United States
561-2972914 (Phone)
561-2972189 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
61
Abstract Views
1,350
rank
443,721
PlumX Metrics