Time-Varying Market, Interest Rate, and Exchange Rate Risk Premia in the U.S. Commercial Bank Stock Returns

Posted: 28 Feb 2021

See all articles by Chu-Sheng Tai

Chu-Sheng Tai

Texas Southern University - Department of Accounting and Finance

Date Written: 2000

Abstract

This paper examines the role of market, interest rate, and exchange rate risks in pricing a sample of the US Commercial Bank stocks by developing and estimating a multi-factor model under both unconditional and conditional frameworks. Three different econometric methodologies are used to conduct the estimations and testing. Estimations based on nonlinear seemingly unrelated regression (NLSUR) via GMM approach indicate that interest rate risk is the only priced factor in the unconditional three-factor model. However, based on ‘pricing kernel’ approach by Dumas and Solnik [(1995). J. Finance 50, 445–479], strong evidence of exchange rate risk is found in both large bank and regional bank stocks in the conditional three-factor model with time-varying risk prices. Finally, estimations based on the multivariate GARCH in mean (MGARCH-M) approach where both conditional first and second moments of bank portfolio returns and risk factors are estimated simultaneously show strong evidence of time-varying interest rate and exchange rate risk premia and weak evidence of time-varying world market risk premium for all three bank portfolios, namely those of Money Center bank, Large bank, and Regional bank.

Keywords: Bank stock returns; Multivariate GARCH-M; Time-varying risk premium

JEL Classification: C32; G12; G21

Suggested Citation

Tai, Chu-Sheng, Time-Varying Market, Interest Rate, and Exchange Rate Risk Premia in the U.S. Commercial Bank Stock Returns (2000). Journal of Multinational Financial Management, Vol. 10, No. 3-4, Pages 397-420, 2000, Available at SSRN: https://ssrn.com/abstract=3758632

Chu-Sheng Tai (Contact Author)

Texas Southern University - Department of Accounting and Finance ( email )

United States

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