A Factor-Garch Approach to Conditional Risk and Return in Banking Stocks: Comparison of Industry Effect in Taiwan, Hong Kong, and Mainland China

33 Pages Posted: 13 Jan 2004

See all articles by Shu-Ling Lin

Shu-Ling Lin

Fu-Jen Catholic University - Department of International Trade and Finance

Jack H.W. Penm

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce

Soushan Wu

Securities & Futures Institute

Wen-Jey Chiu

Fu-Jen Catholic University

Abstract

This paper uses GARCH (1,1)-M modelling to examine the relationships between the systematic risk and the stock return in the banking industry in Taiwan, Hong Kong, and China from 1995 through 2003. The banking industry comprises the large banks and the small-medium size banks. A comparison of industry effect in those three countries is undertaken.

For Taiwan, the industry effect shows that the systematic risk and the stock return both have a significantly positive relationship to the banking industry. In addition, the large banks and small-medium size banks demonstrate industry effects. However small-medium size banks have a greater effect than large banks. After the Asian Financial Crisis of 1997, the effect of lagged error terms became significant. Also, the effects of the systematic risk on the stock return for the banking industry are diminishing. This indicates that the systematic risk is lower in Taiwan's banking industry after the Asian Financial Crisis.

For China, the industry effect shows that the systematic risk and the stock return both also have a significantly positive relationship to the banking industry. However the large banks reveal a higher level of the industry effect. The impacts of conditional variances of the stock return on large banks as a group were significantly negative after the Asian Financial Crisis. In addition, the effects of the systematic risk on the stock return in the banking industry are rising. Nevertheless, the industry effect of the banking industry became lower after the Asian Financial Crisis.

For Hong Kong, the effect shows that the systematic risk and the stock return both have a significant relationship to the banking industry. Large banks have a greater effect than small-medium size banks, and the industry effect of the banking industry in Hong Kong increased after the Asian Financial Crisis.

Keywords: Industry Effect, Systematic Risk, Contagion, GARCH-M Model.

Suggested Citation

Lin, Shu-Ling and Penm, Jack and Wu, Soushan and Chiu, Wen-Jey, A Factor-Garch Approach to Conditional Risk and Return in Banking Stocks: Comparison of Industry Effect in Taiwan, Hong Kong, and Mainland China. Available at SSRN: https://ssrn.com/abstract=485882 or http://dx.doi.org/10.2139/ssrn.485882

Shu-Ling Lin

Fu-Jen Catholic University - Department of International Trade and Finance ( email )

510, Zhongzheng Rd.
Xinzhuang Dist.
New Taipei County, 24205
Taiwan

Jack Penm (Contact Author)

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce ( email )

Canberra, Australian Capital Territory 0200
Australia
+61 (02) 61250535 (Phone)
+61 (02) 61250087 (Fax)

Soushan Wu

Securities & Futures Institute ( email )

9F, 3, Nan-Hai Rd.
Taipei, 10066
Taiwan

Wen-Jey Chiu

Fu-Jen Catholic University

510, Zhongzheng Rd.
Xinzhuang Dist.
New Taipei County, 24205
Taiwan

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