Re-examining the risk–return relationship in banks using quantile regression

Abstract

Financial data for the US banks listed during 2001–2007 are analysed to re-examine the risk–return relationship in the banking industry. A key feature of this study is the analysis of the changing distribution of return on equity across banks and over time by the quantile regression (hereafter QR) model and a meaningful comparative analysis with the results of the ordinary least squares estimates is examined. The following conclusions are drawn from the empirical results. First, while a positive risk–return relationship is presented for the profitable banks, the risk–return relationship is negative for the profitless banks. Second, the ‘V’ shape relationship between bank risk and profitability identified by this study could satisfactorily explain the existing risk–return puzzle among the prior empirical studies.