Is bailout insurance and tail risk priced in bank equities?

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

Abstract

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.

Citation

Del Viva, L., Kasanen, E., Saunders, A., & Trigeorgis, L. (2021). Is bailout insurance and tail risk priced in bank equities?. Journal of Financial Stability, 55, Article 100909. https://doi.org/10.1016/j.jfs.2021.100909

• Journal Article Type: Article
• Acceptance Date: Jun 17, 2021
• Online Publication Date: Jun 23, 2021
• Publication Date: 2021-08
• Deposit Date: Feb 14, 2023
• Journal: Journal of Financial Stability
• Print ISSN: 1572-3089
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 55
• Article Number: 100909
• DOI: https://doi.org/10.1016/j.jfs.2021.100909
• Public URL: https://durham-repository.worktribe.com/output/1179382