Variables Explaining Bank Stock Prices

Abstract

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="color: black; font-size: 10pt;"><span style="font-family: Times New Roman;">The purpose of this study is to examine the relationship between an index of bank common stock prices and a variety of explanatory variables including interest rates on Treasury securities of various maturities and other economic variables.<span style="mso-spacerun: yes;">&nbsp; </span>We also examine the relationship between the term structure of interest rates and bank stock prices.<span style="mso-spacerun: yes;">&nbsp; </span>A sample of week ending values of the bank stock index is used as a proxy for the bank industry.<span style="mso-spacerun: yes;">&nbsp; </span>The weekly closing interest rates for the 13-week Treasury bill, 5-year Treasury note, 10-year Treasury note and the 30-year Treasury bond are used in the study.<span style="mso-spacerun: yes;">&nbsp; </span>Other data used were the U.S. dollar index, the CRB index, the price of gold, the S&amp;P500 stock index, the VIX stock market volatility index and a measure of the yield curve.<span style="mso-spacerun: yes;">&nbsp; </span>Data was taken from January 1998 through November 2009.<span style="mso-spacerun: yes;">&nbsp; </span>Therefore, a total of approximately 620 cases of weekly observations are included in the study.<span style="mso-spacerun: yes;">&nbsp; </span>In order to study the effects of term structure of interest rates on bank stock prices, we take the difference between the 10-year Note and the 13-week Bill.<span style="mso-spacerun: yes;">&nbsp; </span>All variables are converted to a stationary series by taking first differences of each series.<span style="mso-spacerun: yes;">&nbsp; </span>Multiple linear regression is then used to study the variables that can explain bank stock prices.<span style="mso-spacerun: yes;">&nbsp; </span>A stepwise procedure was used to identify those variables with the strongest relationships in a multi-variable equation. <span style="mso-spacerun: yes;">&nbsp;</span>Three independent variables were found with an R-squared of 0.619.<span style="mso-spacerun: yes;">&nbsp; </span>The results of this study corroborate previous studies and have practical implications for investors and for bank managers.</span></span></p>