The banking sector, stress and financial crisis: symmetric and asymmetric analysis

ABSTRACTThis study investigates the impact of economic and financial stress on US banking sector returns during periods of crisis and tranquility. It further examines symmetric and asymmetric effects. The study applies GARCH (1, 1) methodology and describes stock returns based on the Fama–French–Carhart extended capital asset-pricing four systematic factors model. The results indicate that during the entire study period (from 10 January 2003 to 29 September 2017), US banking sector returns responded negatively to stress-induced changes, and investors were more sensitive to stress increases (negative news) than stress declines (positive news), especially during the financial crisis. These results support the view that stress shocks constitute a systematic asset price risk to the US banking sector. Investors and policymakers should both consider these shocks when modelling asset prices and evaluating banks’ stability.