Risk Factors in the Returns for Banks in the European Union

University essay from Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Abstract: The thesis applies and extends the Fama French 3-factor model on public banks in the European Union by using data from 2007 to 2013. Market excess return has similar significance as it does in Fama and French (1993), while SMB and HML perform less well than expected, particularly for smaller banks, suggesting that additional factors might be needed to fully explain the returns, particularly for the smaller banks. The three-factor model is extended by adding two factors formed on book leverage and net interest margin, where the later is special for the banking sector. The statistical tests indicate that both of these factors might be potentially useful risk factors in explaining stock returns as well.

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