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The determinants of bank stock return's co-movements in East Asia

By Carlos Bautista, Philippe Rous and Amine Tarazi

Abstract

We examine co-movements of bank stock returns in eight East Asian countries after the 1997 crisis and attempt to determine the factors that influence them. Unlike Bautista and al (2008) who focus on a measure of the contribution of banks to systemic risk, we consider the return correlations among banks within each country which are used as a dependent variable in weighted least squares regressions. The factors were chosen from a wide range of accounting and market-based indicators, but also macroeconomic and financial development data, using a stepwise procedure. The study finds that financial development is one of the significant determinants of return co-movement but that the share of interbank activities in the balance sheet is not a significant factor. A strong link is found between the bank return co-movements and bank default risk measured by a z-score. To a lesser extent, the share of loan activities in a bank's balance sheet, which is a proxy of opacity, is also a significant factor of the level of correlation.Bank contagion, East Asia, Correlation of bank stock returns

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