Abstract
Using Indian bank-level data, we examine the cross-sectional returns predictability for banking stocks in view of the distinct industry parameters prevalent in the financial services space. We find...
Highlights
We deploy one-way sorting techniques followed by cross-sectional regression proposed by Fama and MacBeth (1973) to test and confirm the presence of abnormal returns at both at the stock level as welland portfolio level in case of Indian banking stocks
In order to test the effects of factors like a bank’s profitability and its investment portfolio without losing out on the relevance of the “size” and “value” investing theories, we propose to develop a joint model using bank-specific conditioning variables classified as Operational Indicators and Asset Quality Indicators alongside the 3-Factor and 4-Factor model to investigate the role of conditioning variables during stock selection and weight allotment in the resultant portfolio
The primary variables arising out of these intermediation activities involving customary and non-conventional financial services capture the latest striking transformations that banks have undergone globally impacting the institutions’ riskiness (Shockley & Thakor, 1997; Carter & Sinkey Jr., 1998; Rogers & Sinkey Jr., 1999). We employ these variables such as previous loan commitments, change in Gross Non-Performing Assets (GNPAs), earnings change, operating margin, return on Assets, capital adequacy and leverage among others to predict the cross-sectional returns of Indian Banking Industry
Summary
As compared against non-financial manufacturing companies, owing to a significant degree of systemic risk, and a very high grade of regulation enforced by multiple-regulatory bodies, we strongly feel the urgency of a separate study to examine the returns predictability of banks leading to their inclusion in the resultant portfolio. We note that financial institutions, in particular “Banks”, are typically excluded while conducting cross-sectional asset pricing studies because of their highly leveraged balancesheet and the multifaceted and strict industry regulations governing them. While evaluating cross-sectional equity returns, Fama and French (1992) excluded highly leveraged financial firms indicating a higher likelihood of distressed balance-sheet. In order to study the effect of industry-led momentum effect, Moskowitz and Grinblatt (1999) separately segregated financial firms and classified them as depository and non-depository institutions
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