Common Stock Regressions for All of the Usual Suspects

The table below shows the estimated parameters, alpha and beta, for a linear regression of the monthly adjusted returns of the common stock of a well known group of companies onto the dynamic trading risk factor series. These regressions are done separately for the pro articulus (01/2001 until 12/2006) and per articulus (01/2007 to date) periods. If the company still exists as an independent entity, a forecast is given for the return for 02/2009 (i.e. this month) based on a "whole dataset" regression (01/2001 to date). The companies studied are: Goldman Sachs; Morgan Stanley; Citigroup; Bank of America; Merrill Lynch; Lehman Brothers; JP Morgan; and, Bear Stearns. (Of course MER, LEH, and BSC terminated at some point within the latter period. For these companies, the regression used data upto the "end" of the company and not for the later trading of "stub" equity in the remnants of the company, if any.)

What is there to conclude from this? Starting with the innocent days of the pro articulus period, we see that all of these firms, with the exception of BAC, have an alpha estimated to be of order -1%/month to -2%/month and a beta of approximately 3 to 4 onto the risk factor. An plausible explanation is that, with the exeption of BAC, these firms all were in the business of trading and the negative alpha represents the high costs of financing this activity. Interestingly, the damage done due to the fiscal crisis, at least as far as the parameter estimates for the per articulus period go, was done idiosyncratically (i.e. it is expressed through the alpha) and not as a result of highly leveraged exposure to dynamic trading.