Time varying CAPM betas and banking sector risk

This paper employs the Bai and Perron (1998, 2003) structural break methodology to investigate whether the CAPM betas for banking sector stocks are time invariant. I find evidence for three large structural shifts in my monthly (1941.02–2008.01) sample. The third break corresponds with a decline in...

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Bibliographic Details
Published inEconomics letters Vol. 115; no. 2; pp. 293 - 295
Main Author Caporale, Tony
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.05.2012
Elsevier
Elsevier Science Ltd
Subjects
Bank stocks
Banking
Banking industry
Banking system
Beta
CAPM
Financial institutions
Financial risk
Financial risks
Risk
Stocks
Structural breaks
Studies
Time
Structural breaks
G1
CAPM
Financial risk
C1
Online AccessGet full text
ISSN0165-1765
1873-7374
DOI10.1016/j.econlet.2011.12.056

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Summary:This paper employs the Bai and Perron (1998, 2003) structural break methodology to investigate whether the CAPM betas for banking sector stocks are time invariant. I find evidence for three large structural shifts in my monthly (1941.02–2008.01) sample. The third break corresponds with a decline in the perceived riskiness of banking stocks in the period starting in 2000.04. The banking sector was thus priced to be less risky during the period associated with rising leverage and financial sector risk. ► CAPM Betas for the S&P Banking Stock Index vary significantly over time. ► A low beta regime begins in 2000.5. ► Banking stocks were priced as low risk investments during the period associated with increased risk taking and leverage.
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ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2011.12.056