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

Fox School of Business Research Paper

20 Pages Posted: 17 Jun 2014

See all articles by Scott Deacle

Scott Deacle

Ursinus College

Elyas Elyasiani

Temple University - Department of Finance

Date Written: June 16, 2014

Abstract

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

Deacle, Scott and Elyasiani, Elyas, Real Estate Investment by Bank Holding Companies and Their Risk and Return: Nonparametric and GARCH Procedures (June 16, 2014). Applied Financial Economics, 2014, Vol. 24, No. 13, 907–926; Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2451265

Scott Deacle

Ursinus College ( email )

Collegeville, PA 19426-2562
United States

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)

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