WORKING PAPERS

1. Do “MEASURES” of Bank Diversification Measure Up? (with Priyank Gandhi and Darius Palia)

• We analyze the effectiveness of several widely-used measures of bank business segment diversification in capturing the ‘diversification effect’, i.e., the ability of the measure to explain variation in idiosyncratic risk over time and across banks. Portfolio theory suggests that bank business segment diversification is negatively correlated with idiosyncratic risk (especially if income from these segments is imperfectly or negatively correlated with each other). We find that several commonly used measures of bank business segment diversification are either poorly or positively correlated with idiosyncratic risk, suggesting that they are inaccurate or misleading indicators of bank business segment diversification. We instead propose an ‘Entropy’ measure that accounts for both the number of businesses segments that a bank operates in as well as the proportion of banks’ incomes from the business segments. In horseraces Entropy performs significantly better in capturing the diversification effect and thus measuring the degree of bank diversification.

• Presented/Scheduled: 2025 Eastern Finance Association Conference, 2024 Sydney Banking and Financial Stability Conference, Rutgers Business School, Sacred Heart University, Pacific Basin Finance, Economics, Accounting and Management Conference, American Finance Association Committee on Racial Diversity Workshop

2. Bank Diversification and Tail Risk (with Priyank Gandhi and Darius Palia)

• We examine the relationship between bank business line diversification and tail risk by assessing diversification across 16 business lines using a unique entropy-based measure. The results reveal that a one standard deviation increase in diversification is associated with a 2.5% reduction in tail risk in the subsequent quarter. This effect lasts up to four quarters ahead and is present in both good and bad times. Furthermore, diversified banks exhibit higher future stock returns in the next three quarters, higher profitability, lower default risk, higher change in loan supply, and lending resilience during the Great Recession. Lastly, diversification of core business lines (related diversification) is associated with lower tail risk and higher returns while diversification of noncore business lines (unrelated diversification) is not. This paper emphasizes the crucial role of diversification across business lines in mitigating tail risk and enhancing overall bank performance particularly during periods of financial instability and documents that it is related diversification that benefits banks.

• Presented/Scheduled: 2025 European Financial Management Association Conference, 2025 Southwestern Finance Association Conference, 2025 Contemporary Issues in Financial Markets and Banking, 2024 Northeast Business and Economics Association Conference, Inter-Finance PhD Seminar, Hofstra University, Xavier University, The College of New Jersey, Rutgers Business School, Sacred Heart University, University of the District of Columbia

• Awards/Grants: 

Shortlisted for Best Papers, 2025 Contemporary Issues in Financial Markets and Banking 

Graduate Student Travel Award, Rutgers University

PhD Student Travel Grant, 2025 Southwestern Finance Association Conference

PhD Student Scholarship Award, 2024 Northeast Business and Economics Association Conference

WORK IN PROGRESS

3. Measuring the Cost of Capital for Banks (with Priyank Gandhi and Darius Palia)

• The existing banking literature lacks consensus on the optimal metric for assessing banks’ cost of capital, despite its frequent use of the Capital Asset Pricing Model (CAPM), which fails to explain significant variations in expected returns. Our study addresses this gap by systematically comparing various metrics and proposing a more effective one, enabling us to revisit the low-risk anomaly in bank stock returns where banks with lower leverage exhibit higher returns. Furthermore, we reassess the impact of the Dodd-Frank Act’s Volcker Rule on banks’ cost of capital.