An Examination of The Stability of Bank Betas During Extreme Market Volatility: The Case ff The Financial Crisis and The Pandemic

We examine the time-varying nature of bank beta coefficients during periods of extreme market volatility. Specifically, we observe a rise in betas during the global financial crisis of 2007-2009 and the current Covid-19 pandemic, when using two common bank indices and the S&P 500 index as proxie...

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Bibliographic Details
Published in:Banking and finance review 2020-01, Vol.12 (1), p.15-31
Main Authors: Walker, John S, Geyfman, Victoria, Tekatli, Necati
Format: Article
Language:English
Subjects:
Bank management
Bank stocks
Banking industry
Capital assets
Coronaviruses
COVID-19
Diversification
Econometrics
Economic crisis
Equity capital
Estimates
International finance
Investments
Literature reviews
Medical research
Pandemics
Stock exchanges
Stockholders
Volatility
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Summary:We examine the time-varying nature of bank beta coefficients during periods of extreme market volatility. Specifically, we observe a rise in betas during the global financial crisis of 2007-2009 and the current Covid-19 pandemic, when using two common bank indices and the S&P 500 index as proxies for systematic risk. Periods of volatile market conditions offer a test of diversification and whether or not market betas are stable over time. This study highlights shortcomings of the standard ordinary least squares estimation of market betas used in the capital asset pricing model. We apply more rigorous econometric-based techniques, including Kalman filtering, to examine the stability of beta coefficients and to detect structural breaks during periods of extreme market volatility. This analysis should be of interest to academicians, consultants, and bank practitioners who are trying to estimate accurate market betas for cost of capital calculations and fair market valuations of bank stocks.
ISSN:1947-7945
1947-6140