Time-varying conditional beta, return spillovers, and dynamic bank diversification strategies

This paper investigates how time-varying beta and return spillovers relate to bank diversification strategies conditional on market states, from a portfolio management approach. This paper explores the methods of estimating beta in a time-varying fashion for banking data. Further, it discovers the regime switching relationship between bank betas and returns. Finally, this paper analyzes how the dynamic relationship between betas and returns implies to bank diversification strategies. The main findings are: 1) Bank betas are time-varying and the relationship between betas and returns in banking is regime dependent; 2) banks use different diversification strategies in response to market movements conditional on market stability; 3) return spillovers among the banking industry affect bank returns through activity diversification. (C) 2020 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.