The Sensitivity of Bank Stock Returns to Market, Interest and Exchange Rate Risks

This paper presents and estimates a multifactor model of bank stock returns that incorporates market return, interest rate and exchange rate risk factors. A model of the optimizing behavior of an international banking tirm is used to derive the sensitivity coefficients of the alternative factors. Regression equations are estimated that are based on either actual or unexpected values of the underlying factors with a post-October 1979 time dummy variable and with a money-center bank dummy variable. Standard results are obtained for the market and interest rate variables while new results are derived for the exchange rate variable. The specific effects of the latter variable are found to be dependent on the time period of observation and the money-center status of banks