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

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.