Asset pricing with a bank risk factor

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Abstract

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.

Original languageEnglish
Pages (from-to)993-1032
JournalJournal of Money, Credit and Banking
Volume50
Issue number5
DOIs
Publication statusPublished - Aug 2018

Keywords

  • Asset pricing
  • Banking
  • Distance to default
  • Factor model

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