A Market-Based Risk Classification of Financial Institutions

96-37

34 Pages Posted: 17 Dec 1996

See all articles by Alan C. Hess

Alan C. Hess

University of Washington - Michael G. Foster School of Business

Kirati Laisathit

Chulalongkorn University - Department of Banking & Finance

Date Written: November 1996

Abstract

This paper derives, estimates, and analyzes a multi-factor model of the monthly holding period returns on the stocks of exchange-traded financial institutions. In addition to bond and equity returns, the factors include default, liquidity, and term structure risk premiums plus variables that measure changes in deposit demand. To ensure that our sample has a large number of firms, we use data from January 1981 through December 1988. The equity return explains a large share of time-series variation in financial institutions returns. The additional factors implied by banking theory have little incremental explanatory power. The two-factor model regression coefficients have considerable cross-sectional variation. This permits us to group banks into portfolios with similar risk exposures. These portfolios bear no relation to the SIC codes that group banks by their charters and lines of business.

JEL Classification: D81

Suggested Citation

Hess, Alan C. and Laisathit, Kirati, A Market-Based Risk Classification of Financial Institutions (November 1996). 96-37. Available at SSRN: https://ssrn.com/abstract=978 or http://dx.doi.org/10.2139/ssrn.978

Alan C. Hess (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543 4579 (Phone)
206-543-6809 (Fax)

Kirati Laisathit

Chulalongkorn University - Department of Banking & Finance

Thailand

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