Convergence and Risk-Return Linkages Across Financial Service Firms

Journal of Banking & Finance 31 (2007) 1167–1190

Fox School of Business Research Paper

24 Pages Posted: 17 Jun 2014

See all articles by Elyas Elyasiani

Elyas Elyasiani

Temple University - Department of Finance

Iqbal Mansur

Widener University - School of Business Administration

Michael S. Pagano

Villanova University - Villanova School of Business

Date Written: December 1, 2006

Abstract

We examine the risk and return linkages across US commercial banks, securities firms, and life insurance companies during the 1991-2001 period. After controlling for changes in the broader stock market, interest rates, and foreign currency values, we find that return and risk interdependencies across these financial firms are significant and size-varying; larger institutions display stronger volatility transmission linkages, while smaller ones exhibit more prominent return-related linkages. The tighter link in risk among large financial institutions (FIs) suggests stronger convergence, employment of common models of risk measurement and risk management, and more intense inter-industry competition, particularly between large banks and large securities firms, compared to smaller institutions. Lack of risk spillover among smaller FIs confirms the intuition that they typically assume more localized and idiosyncratic risk. The co-movement of stock returns among smaller FIs has been helped by the effects of locally based factors, such as economic conditions and state regulations, on all such institutions, and a less diversified product set. Differences in spillover patterns between large and smaller institutions have implications on investment choices and mergers and acquisitions in the industry. Introduction of the Gramm-Leach-Bliley Act (1999) has had dissimilar effects on the riskiness of large versus smaller life insurance and securities firms, and an insignificant effect on commercial banks.

Keywords: Banks, Investment banks, Insurance companies, Convergence, Spillover, GARCH

JEL Classification: G20, G21, G12, C32

Suggested Citation

Elyasiani, Elyas and Mansur, Iqbal and Pagano, Michael S., Convergence and Risk-Return Linkages Across Financial Service Firms (December 1, 2006). Journal of Banking & Finance 31 (2007) 1167–1190; Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2451158

Elyas Elyasiani (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-5881 (Phone)
215-204-5698 (Fax)

Iqbal Mansur

Widener University - School of Business Administration ( email )

3800 Vartan Way
PO Box 69381
Harrisburg, PA 17106-9381
United States

Michael S. Pagano

Villanova University - Villanova School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States
(610) 519-4389 (Phone)

HOME PAGE: http://www90.homepage.villanova.edu/michael.pagano

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