Banks, risk, and the business cycle: an analysis based on real-time data

Renatas Kizys, C. Pierdzioch

Research output: Contribution to journalArticlepeer-review

Abstract

An important question for stock market investors and bank supervisors is to which extent the stock returns of banks reflect business-cycle-sensitive risk in the banking industry. In order to answer this question, we used the stochastic discount factor model to derive a multivariate exponential GARCH-in-mean model. We used monthly U.S. data for the period from 1980 to 2006, for both real-time and revised macroeconomic data to estimate the model. Our empirical results show that using real-time rather than revised macroeconomic data can significantly alter estimates of the risk premium that stock market investors require for bearing business-cycle-sensitive risk in the banking industry.
Original languageEnglish
Pages (from-to)57-72
Number of pages16
JournalThe Banking and Finance Review
Volume2
Issue number1
Publication statusPublished - 2010

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