Size anomalies and tail risk in European bank stock returns

Abstract

I provide new evidence on a size anomaly in European bank stock returns. Consistent with Gandhi and Lustig (2015), the largest European commercial bank stocks, ranked by either total assets or market capitalization, have significantly lower risk-adjusted returns. I argue that the anomaly is explained by implicit government guarantees absorbing tail risk from large banks. However, contrary to Park and Kim’s (2016) findings in the U.S., a tail risk factor constructed from the cross-section of stock returns does not properly capture the size-dependent return difference.