Journal Paper By A Math Graduate Student

A paper co-authored by Ms. Kaiyi Chen (a former masters’ student at UCA in applied mathematics), Dr. Ling He (Carmichael Professor Finance), and Dr. R. B. Lenin (Associate Professor of Mathematics) has been accepted for publication in the Journal of Risk Finance.  The paper is based on Chen’s thesis “Time Variation Paths of Risk Sensitivities of Bank Stocks in Past Two Decades.”  Dr. Lenin was the principle thesis advisor.

This paper incorporates the Flexible Least Squares (FLS) approach with a free statistical computing and graphics software R to estimate the three-factor model developed by He and Reichert in 2003 to trace time variation paths in risk sensitivities of bank stock returns during 1990-2014, one of the most serious financial crises period in the U.S. history. The results of the paper show that interest rate sensitivity of bank stock returns coincides with the   dramatic changes in the bond market. It was significantly positive before the 2006 subprime mortgage crisis, reduced to insignificant between 2006 and 2008, and turned into significantly negative between 2008 to 2014. Further, the results of this study found that bank stocks negatively respond to changes in housing prices between1990-1994 and after that the sensitivity turns into significantly positive. The significant shifts in risk sensitivities of banks stock returns coincide alterations in long-term interest rates and monetary policy, especially, the enormously stimulative monetary policy after the financial crisis in 2008.

Ms. Chen is currently pursuing a master’s in statistics at the University of Missouri-Columbia where she plans to complete her  Ph.D. in statistics.