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Size Value and Asset Quality Premium in European Banking Stocks

Author

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  • Nawazish Mirza

    (CREB - Centre for Research in Economics and Business - Lahore School of Economics)

  • Herve Alexandre

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

Banking firms exhibit unique business and financial dynamics that are priced in their stock returns. This paper compares traditional empirical asset pricing models on portfolio of banking firms from fourteen European countries and proposes a banking specific risk factor. We compared a single factor CAPM with three factors Fama and French model on exchange rate adjusted returns and found substantial support for firm specific factors of size and value. We propose that asset quality premium (proportion of non-performing loans to total advances and measured as BMG - bad minus good) constitutes an important asset pricing factor for banking stocks. The portfolios sorted on size, value and asset quality explained the maximum variation in returns depicting asset quality as a critical investment factor for banking stocks. These results have considerable implications for investment appraisals, cost of capital and risk management in financial stocks.

Suggested Citation

  • Nawazish Mirza & Herve Alexandre, 2010. "Size Value and Asset Quality Premium in European Banking Stocks," Working Papers halshs-00578921, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00578921
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00578921
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    References listed on IDEAS

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    1. Elyasiani, Elyas & Mansur, Iqbal, 1998. "Sensitivity of the bank stock returns distribution to changes in the level and volatility of interest rate: A GARCH-M model," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 535-563, May.
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    Cited by:

    1. Foos, Daniel & Lütkebohmert, Eva & Markovych, Mariia & Pliszka, Kamil, 2017. "Euro area banks' interest rate risk exposure to level, slope and curvature swings in the yield curve," Discussion Papers 24/2017, Deutsche Bundesbank.
    2. Ishak Ramli, 2015. "Forced Bank Mergers and SME Financing," International Journal of Management Science and Business Administration, Inovatus Services Ltd., vol. 1(8), pages 30-36, July.

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    More about this item

    Keywords

    Banking Stocks; Asset Quality; Size Premiuim; Value Premium; factor model;
    All these keywords.

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