Abstract

This paper investigates whether there is a banking risk premium that helps explain the returns of US publicly listed firms. We assess this research question in the context of the CAPM and the Fama-French three-factor model. We use bank size to create the banking factor return (BNK) - the return on a mimicking portfolio that is long (short) big (small) banks. We find a positive premium for BNK and our analysis supports a risk-based interpretation, since the premium is priced. Our findings are notable since they point to a slight superiority of CAPM augmented by BNK over the counterpart that augments the Fama-French model with BNK.