Variables Explaining Bank Stock Prices

Abstract

The purpose of this study is to examine the relationship between an index of bank common stock prices and a variety of explanatory variables including interest rates on Treasury securities of various maturities and other economic variables.  We also examine the relationship between the term structure of interest rates and bank stock prices.  A sample of week ending values of the bank stock index is used as a proxy for the bank industry.  The weekly closing interest rates for the 13-week Treasury bill, 5-year Treasury note, 10-year Treasury note and the 30-year Treasury bond are used in the study.  Other data used were the U.S. dollar index, the CRB index, the price of gold, the S&P500 stock index, the VIX stock market volatility index and a measure of the yield curve.  Data was taken from January 1998 through November 2009.  Therefore, a total of approximately 620 cases of weekly observations are included in the study.  In order to study the effects of term structure of interest rates on bank stock prices, we take the difference between the 10-year Note and the 13-week Bill.  All variables are converted to a stationary series by taking first differences of each series.  Multiple linear regression is then used to study the variables that can explain bank stock prices.  A stepwise procedure was used to identify those variables with the strongest relationships in a multi-variable equation.  Three independent variables were found with an R-squared of 0.619.  The results of this study corroborate previous studies and have practical implications for investors and for bank managers.