Financial crises and the asymmetric relation between returns on banks, risk factors, and other industry portfolio returns
Kenneth Högholm
Department of Finance and Statistics, Hanken School of Economics, Helsinki, Finland
Search for more papers by this authorJohan Knif
Department of Finance and Statistics, Hanken School of Economics, Helsinki, Finland
Search for more papers by this authorCorresponding Author
Gregory Koutmos
Department of Finance, Charles F. Dolan School of Business, Fairfield University, Fairfield, Connecticut
Correspondence
Gregory Koutmos, Department of Finance, Charles F. Dolan School of Business, Fairfield University, Fairfield, CT 06430.
Email: gkoutmos@fairfield.edu
Search for more papers by this authorSeppo Pynnönen
Department of Statistics, University of Vaasa, Vaasa, Finland
Search for more papers by this authorKenneth Högholm
Department of Finance and Statistics, Hanken School of Economics, Helsinki, Finland
Search for more papers by this authorJohan Knif
Department of Finance and Statistics, Hanken School of Economics, Helsinki, Finland
Search for more papers by this authorCorresponding Author
Gregory Koutmos
Department of Finance, Charles F. Dolan School of Business, Fairfield University, Fairfield, Connecticut
Correspondence
Gregory Koutmos, Department of Finance, Charles F. Dolan School of Business, Fairfield University, Fairfield, CT 06430.
Email: gkoutmos@fairfield.edu
Search for more papers by this authorSeppo Pynnönen
Department of Statistics, University of Vaasa, Vaasa, Finland
Search for more papers by this authorAbstract
We show that the relations between the returns on the banking industry, risk factors, and other industries often are asymmetric. Lagged banking industry returns seem to improve predictability but the positive impact of a 1-month lag of the return on the banking portfolio is much higher in the lower part of the return distribution. However, after the Dodd-Frank Act in 2010, the cross-autocorrelation with banks is changed and becomes negative in the upper part of the distribution. Returns on banks also seem to lead returns on five risk factors. This relation, however, is not robust across the distribution.
Supporting Information
Filename | Description |
---|---|
fire12214-sup-0001-OnlineAppendix.pdf258.8 KB | Online-Appendix |
Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
REFERENCES
- Altay, E. (2004). Cross-autocorrelation between small and large cap portfolios in the German and Turkish stock markets. Journal of Financial Management and Analysis, 17, 77–92.
- Anari, A., Kolari, J., & Mason, J. (2004). Further evidence of nonmonetary effects on the U.S. economy during the Great Depression. Journal of Money, Credit and Banking, 28, 2331–2351.
- Anderson, R., Eom, K., Hahn, S., & Park, J.-H. (2013). Autocorrelation and partial price adjustment. Journal of Empirical Finance, 24, 78–93.
- Ayers, B., & Freeman, R. (2000). Why do large firms’ prices anticipate earnings earlier than small firms’ prices? Contemporary Accounting Research, 17, 191–212.
10.1506/M9B9-RQD7-U8KA-503U Google Scholar
- Baron, M., Verner, E., & Xiong, W. (2019). Salient crises, quiet crises. Working paper. Retrieved from https://ssrn.com/abstract=3116148
- Baur, D., Dimpfl, T., & Jung, R. (2012). Stock return autocorrelation revisited: A quantile regression approach. Journal of Empirical Finance, 19, 254–265.
- Bernanke, B. S. (1993). Credit in the macroeconomy. Quarterly Review, Federal Reserve Bank of New York, 18, 50–70.
- Bernanke, B. S., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9, 27–48.
- Bernhardt, D., & Mahani, R. (2007). Asymmetric information and stock return cross-autocorrelations. Economic Letters, 96, 14–22.
- Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, LII, 57–82.
10.1111/j.1540-6261.1997.tb03808.x Google Scholar
- Cen, L., Chan, K., Dasgupta, S., & Gao, N. (2013). When the tail wags the dog: Industry leaders, limited attention and spurious cross-industry information diffusion. Management Science, 59, 2566–2585.
- Chan, K. (1993). Imperfect information and cross-autocorrelation among stock prices. Journal of Finance, XLVIII, 1211–1230.
10.1111/j.1540-6261.1993.tb04752.x Google Scholar
- Chen, S.-S. (2007). Does monetary policy have asymmetric effects on stock returns? Journal of Money, Credit and Banking, 39, 667–688.
- Chou, P.-H., Ho, P.-H., & Ko, K.-C. (2013). Do industries matter in explaining stock returns and asset-pricing anomalies? Journal of Banking & Finance, 36, 355–370.
- Doong, S.-H., Yang, S.-Y., & Chiang, T. (2005). Response asymmetries in Asian stock markets. Review of Pacific Basin Financial Markets and Policies, 8, 637–657.
10.1142/S0219091505000592 Google Scholar
- Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3–56.
- Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116, 1–22.
- Gorton, G., & Winton, A. (2002). Financial intermediaries. In G. M. Constantinides, M. Harris, & R. M. Stulz (Eds.), Handbook of Economics and Finance (Vol. 1, pp. 431–552). Amsterdam: Elsevier.
- Hameed, A. (1997). Time-varying factors and cross-autocorrelations in short-horizon stock returns. Journal of Financial Research, 20, 435–458.
10.1111/j.1475-6803.1997.tb00259.x Google Scholar
- Hammami, Y., & Lindahl, A. (2014). An intertemporal capital asset pricing model with bank credit growth as a state variable. Journal of Banking and Finance, 39, 14–28.
- Högholm, K., Knif, J., & Koutmos, G. (2014). Asymmetric dynamic linkages between returns on banks and other industry portfolio returns (Contributions to Mathematics, Statistics, Econometrics, and Finance, Essays in the Honour of Professor Seppo Pynnönen). Acta Wasaensia, 296, 209–230.
- Högholm, K., Knif, J., Koutmos, G., & Pynnönen, S. (2011). Distributional asymmetry of loadings on market co-moments. Journal of International Financial Markets, Institutions & Money, 21, 851–866.
- Högholm, K., Knif, J., Koutmos, G., & Pynnönen, S. (2018). Asymmetric fund performance characteristics—A comparison of European and US large-cap funds. Multinational Finance Journal, 21(1), 1–20.
- Högholm, K., Knif, J., & Pynnönen, S. (2011a). Cross-distributional robustness of weekday effects: Evidence from European equity index returns. European Journal of Finance, 17, 377–390.
- Högholm, K., Knif, J., & Pynnönen, S. (2011b). Fund performance robustness: An evaluation using European large-cap equity funds. Frontiers in Finance and Economics, 8, 1–26.
- Hong, H., Torous, W., & Valkanov, R. (2007). Do industries lead stock markets? Journal of Financial Economics, 83, 367–396.
- Hou, K. (2007). Industry information diffusion and the lead-lag effect in stock returns. Review of Financial Studies, 20, 1113–1138.
- Kinnunen, J. 2013. Risk-return trade-off and autocorrelation (Ph.D. dissertation). Lappeenranta University of Technology, Lappeenranta, Finland.
- Koenker, R. (2005). Quantile regression. New York: Cambridge University Press.
- Koenker, R., & Bassett, G. (1978). Regression quantiles. Econometrica, 4, 41–55.
- Laopodis, N. (2016). Industry returns, market returns and economic fundamentals: Evidence for the United States. Economic Modelling, 53, 89–106.
- Lee, C.-C., Chen, M.-P., & Chang, C.-H. (2013). Dynamic relationships between industry returns and stock market returns. North American Journal of Economics and Finance, 26, 119–144.
- Lo, A., & MacKinley, C. (1990a). An econometric analysis of nonsynchronous trading. Journal of Econometrics, 45, 181–211.
- Lo, A., & MacKinley, C. (1990b). When are contrarian profits due to stock market overreaction? Review of Financial Studies, 3, 175–205.
- McQueen, G., Pinegar, M., & Thorley, S. (1996). Delayed reaction to good news and the cross-autocorrelation of portfolio returns. Journal of Finance, LI, 889–919.
10.1111/j.1540-6261.1996.tb02711.x Google Scholar
- Merton, R. (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, XLII, 483–510.
10.1111/j.1540-6261.1987.tb04565.x Google Scholar
- Tse, Y. (2015). Do industries lead stock markets? A reexamination. Journal of Empirical Finance, 34, 195–203.
- Zebedee, A., & Kasch-Haroutounian, M. (2009). A closer look at co-movements among stock returns. Journal of Economics and Business, 61, 279–294.
10.1016/j.jeconbus.2008.11.001 Google Scholar