NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms

Edward J. Kane, Haluk Unal

NBER Working Paper No. 2693 (Also Reprint No. r1408)
Issued in August 1988
NBER Program(s):   ME

This paper decomposes both the market sensitivity and the interest-rate sensitivity of bank stock into on-balance-sheet and off-balance-sheet components. It derives these constituent and often-offsetting sensitivities from a nonstationary three-equation model that employs accounting and capital-market information to explain cross-sectional and temporal variation in the value of stockholder equity. To control statistically for heteroskedasticity and intrasample differences in unbooked capital positions, the model is estimated separately for three size classes of large U.S. banks. Parameter estimates confirm the importance of "hidden" or unbooked capital at these banks. For the nation's very largest banks, shifts in the value of these parameters are consistent with the view that the capitalized value of federal deposit-insurance guarantees burgeoned in the 1980s with interest volatility, demonstrations of regulatory forbearance, and relaxation of deposit-rate ceilings.

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Document Object Identifier (DOI): 10.3386/w2693

Published: The Journal of Finance, Vol. XLV, No. 1, pp. 113-136, (March 1990).

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