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Asset Pricing with a Bank Risk Factor

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  • JOÃO PEDRO PEREIRA
  • ANTÓNIO RUA
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.

Suggested Citation

  • João Pedro Pereira & António Rua, 2018. "Asset Pricing with a Bank Risk Factor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(5), pages 993-1032, August.
    • Handle: RePEc:wly:jmoncb:v:50:y:2018:i:5:p:993-1032
    DOI: 10.1111/jmcb.12473
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