| In this dissertation, an empirical investigation is undertaken of the relationship between the stock returns of bank holding companies (BHCs) and economic and banking industry risk factors during the 1969-1989 period. Using alternative factor models of stock returns, the cross-sectional differences between portfolios of BHCs and those of other industry groups are examined in relation to economic risk factors proxied by interest rate variables. Temporal analysis is undertaken through subdivision of the 21-year period into four subperiods. Intra-industry differences between the BHCs, grouped according to size/nature of business/location are also examined in relation to the economic risk variables as well as to changes in the market perception of banking industry risk.;The findings provide evidence of significant differences in the stock market's perception of the risk of banking firms vis-a-vis other industry groups. Perceptions of higher or increasing interest rate and default risks of banks since the mid-1970s, compared to other firms in general, were reflected in the stock prices of the BHCs. Also, significant differences in the perception of bank risk across the BHC groups are evident. These results have important public policy implications with regard to the 'market discipline' of bank risk-taking, regulation, and the 'de facto' protection of large banks. |
