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Bank Stock Prices. Discussion by: Philip E. Strahan Boston College September 2006. Research Questions. Furlong & Kwan : What drives the level of bank stock prices (market-to-book)? Schuermann & Stiroh : What drives variation in bank stock prices?.

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bank stock prices

Bank Stock Prices

Discussion by:

Philip E. Strahan

Boston College

September 2006

research questions
Research Questions
  • Furlong & Kwan: What drives the level of bank stock prices (market-to-book)?
  • Schuermann & Stiroh: What drives variation in bank stock prices?
what is correlated with the level of bank stock prices
What is correlated with the level of bank stock prices?
  • Market trends
    • Bank MTB rose in the 1990s
  • Bank characteristics
    • Core deposits (++)
    • Efficiency = Revenues / Expenses (++)
    • Non-interest income share (++, large banks)
    • Loan shares (??)
    • Log of assets (??)
strong claims
Strong claims
  • “rebound in bank charter values suggests that … banks remain special”
  • “negative effect of size on relative charter value…would be consistent with policy measures having reduced market’s expectations for TBTF rescues…”
  • “provision of core deposit services contributes to charter value ratios…”
  • “the market apparently has seen the reliance on fee-based activities as a positive development”
how do you interpret these regression
How do you interpret these regression?
  • Bank size and stock prices (CV)
    • TBTF banks will have high stock prices
    • Large banks may be more or less efficient
    • High CV banks will grow
    • High CV banks will buy low CV banks
    • High CV (e.g. Tobin’s Q > 1) will lead to capacity expansion in the industry
how do you interpret these regression6
How do you interpret these regression?
  • Lending activity & stock prices
    • Are C&I loan markets competitive
    • Or, do banks with high CV avoid risky business loans?
  • Non-interest income share
    • Levels (MTB) v. returns
  • Efficiency (revenue per $ of expenses)
    • What makes banks have efficient?
suggestions for furlong kwan
Suggestions for Furlong & Kwan
  • Soft-pedal some claims
    • Paper has no identification strategy to sort our casuality
  • Decompose results into cross-sectional and time-series dimensions
    • Between v. firm fixed effects results
  • Report / discuss sample properties – e.g. how do you handle M&A?
  • Cluster residuals at bank-level for more conservative statistical tests
what is correlated with variation in bank stock prices
What is correlated with variation in bank stock prices?
  • Market factor dominates
  • Residual correlation remains, even with 9-factor model
  • Bank returns more correlated to market than other firms
  • Large bank betas >> small bank betas
  • Residual correlation for large banks >> for small
questions
Questions
  • What is the role of credit, interest rate and liquidity risks?
    • Less true for small banks
    • Estimate models with just credit, interest rate and liquidity factors
  • Is residual cross-bank correlation large or small?
suggestions for schuermann stiroh
Suggestions for Schuermann & Stiroh
  • Focus on issue of systemic risk
    • What happens to factor loadings during ‘events’?
    • What happens to residual correlation across banks during events?
  • Why are large bank returns so much more systematic?
    • Incentives (exploit variation in TBTF over time)
    • Clients (large v. small borrowers)
    • Product difference (derivatives; off-balance sheet commitments; loan portfolios)
is mtb ratio still correlated with stock market variation
Is MTB ratio (still) correlated with stock-market variation?
  • Systematic (beta)
  • Idiosyncratic
  • Residual correlation (or, loading on bank-factor)