The cost of capital of the financial sector

Arbeitspapier

Standard factor pricing models do not capture well the common time-series or cross-sectional variation in average returns of financial stocks. We propose a five-factor asset pricing model that complements the standard Fama and French (1993) three-factor model with a financial sector ROE factor (FROE) and the spread between the financial sector and the market return (SPREAD). This five-factor model helps to alleviate the pricing anomalies for financial sector stocks and also performs well for nonfinancial sector stocks compared with the Fama and French (2014) five-factor model or the Hou, Xue, and Zhang (2014) four-factor models. We find that the aggregate expected return to financial sector equities correlates negatively with aggregate financial sector ROE, which is puzzling, as ROE is commonly used as a measure of the cost of capital in the financial sector.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Staff Report ; No. 755

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Thema: cost of capital ; financial intermediation ; asset pricing ; capital structure

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Adrian, Tobias ; Friedman, Evan ; Muir, Tyler
• Ereignis: Veröffentlichung
• (wer): Federal Reserve Bank of New York
• (wo): New York, NY
• (wann): 2015

Weitere Informationen

• Handle: http://hdl.handle.net/10419/130640
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ