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Asset Pricing with a Bank Risk Factor
Author(s) -
PEREIRA JOÃO PEDRO,
RUA ANTÓNIO
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12473
Subject(s) - capital asset pricing model , stock (firearms) , business , excess return , financial economics , economics , financial system , monetary economics , finance , mechanical engineering , paleontology , context (archaeology) , engineering , biology
This paper studies how the state of the banking sector influences stock returns of nonfinancial firms. We consider a two‐factor pricing model, where the first factor is the traditional market excess return and the second factor is the change in the average distance to default of commercial banks. We find that this bank factor is priced in the cross section of U.S. nonfinancial firms. Controlling for market beta, the expected excess return for a stock in the top quintile of bank risk exposure is on average 2.83% higher than for a stock in the bottom quintile.