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Time variation paths of factors affecting financial institutions and stock returns

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  • Ling He
  • Alan Reichert

Abstract

This study finds evidence that three risk factors relating to the stock market, bond market, and real estate market are important in explaining the risk premiums included in financial institutions and bank stock returns. Stock returns for insurance companies are not sensitive to changes in the bond market. The Flexible Least Squares (FLS) results indicate that the stock market factor has the most important and stable impact on risk premiums for financial institutions, banks, and insurance companies. The bond market is the primary source of instability in stock returns for these three groups of stocks. This research adds further support for using market discipline, especially as it relates to equity returns to enhance the prudential regulation of the financial sector. Copyright International Atlantic Economic Society 2003

Suggested Citation

  • Ling He & Alan Reichert, 2003. "Time variation paths of factors affecting financial institutions and stock returns," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 31(1), pages 71-86, March.
    • Handle: RePEc:kap:atlecj:v:31:y:2003:i:1:p:71-86
    DOI: 10.1007/BF02298464
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    Cited by:

    1. Elyas Elyasiani & Iqbal Mansur & Jill Wetmore, 2010. "Real-Estate Risk Effects on Financial Institutions’ Stock Return Distribution: a Bivariate GARCH Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 40(1), pages 89-107, January.
    2. He, Ling T., 2005. "Instability and predictability of factor betas of industrial stocks: The Flexible Least Squares solutions," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(4-5), pages 619-640, September.

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