Real Estate Investment by Bank Holding Companies and Their Risk and Return: Nonparametric and GARCH Procedures
Applied Financial Economics, 2014, Vol. 24, No. 13, 907–926
20 Pages Posted: 17 Jun 2014
Date Written: June 16, 2014
We investigate the association between real estate investment by US Bank Holding Companies (BHCs) and their return, risk and risk-adjusted returns. Three portfolios are formed of BHCs according to whether they do or do not invest in real estate, strictness of the regulation on real estate investment and the ratio of real estate investment to assets. Wilcoxon tests of differences in portfolio returns, risk, risk-adjusted returns and value at risk between each pair of portfolios are conducted to determine how engagement in real estate, stricter regulation and increased real estate investment affect BHC performance. These effects are also investigated within a GARCH framework. Wilcoxon tests indicate that real estate investment or operating under lenient rules lower return and risk-adjusted returns and raise risk. Within GARCH, increases in real estate investment are associated with lower returns and greater systematic risk for BHCs with higher real estate shares in assets. These results indicate that benefits from real estate investment by banks are outweighed by greater variability of real estate prices and BHCs’ lack of expertise in the field. BHCs in the sample invested no more than 4.54% of their assets in real estate, leaving open the possibility that a higher threshold exists, beyond which performance improvements would be manifested.
Keywords: Bank Holding Companies, product diversification, real estate, risk
JEL Classification: G21, G28
Suggested Citation: Suggested Citation