Is bailout insurance and tail risk priced in bank equities?

Luca Del Viva, Eero Kasanen, Anthony Saunders, Lenos Trigeorgis

Producció científica: Article en revista indexadaArticleAvaluat per experts

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We present a pricing model of bank bailout insurance guarantees against tail risk and empirical evidence that provides a rational explanation why big bank equities “underperform” relative to small banks during normal times while they “overperform” during crises. A new measure accounting for left-tail risk protection against losses conditional on a crisis explains the “underperformance” of large banks during normal periods. Over the long-term spanning several economic cycles, bank assets are fairly priced regardless of size. Our empirical evidence supports our model's predicted pattern of excess bank return reversals across economic cycles following Too-Big-To-Fail (TBTF) bailout policy in 1984.

Idioma originalAnglès
Número d’article100909
RevistaJournal of Financial Stability
Estat de la publicacióPublicada - d’ag. 2021
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