NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Size Anomalies in U.S. Bank Stock Returns: A Fiscal Explanation

Priyank Gandhi, Hanno Lustig

NBER Working Paper No. 16553
Issued in November 2010
NBER Program(s):   AP   CF   PE

The largest commercial bank stocks, ranked by total size of the balance sheet, have significantly lower risk-adjusted returns than small- and medium-sized bank stocks, even though large banks are significantly more levered. We uncover a size factor in the component of bank returns that is orthogonal to the standard risk factors, including small-minus-big, which has the right covariance with bank returns to explain the average risk-adjusted returns. This factor measures size-dependent exposure to bank-specific tail risk. These findings are consistent with government guarantees that protect shareholders of large banks, but not small banks, in disaster states.

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This paper was revised on November 13, 2014

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Document Object Identifier (DOI): 10.3386/w16553

Published: Size Anomalies in U.S. Bank Stock Returns PRIYANK GANDHI andHANNO LUSTIG† Article first published online: 12 MAR 2015 DOI: 10.1111/jofi.12235 © 2015 the American Finance Association Issue The Journal of Finance The Journal of Finance Volume 70, Issue 2, pages 733–768, April 2015

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