The association between banks' performance ratios and market-determined measures of risk

The primary objective of this study was to determine how successful the banks' financial ratios had been in reproducing the market-determined measures of risks. Two measures of market risk, systematic risk given by beta and total risk represented by the standard deviations, for 59 commercial banks over the period of January 1986 to September 1990 were calculated. Each risk measure was regressed (using both OLS and the Ridge regression methods) on the banks' financial ratios to determine the existence of a linear relationship. Findings of this study are somewhat contradictory to prior studies. The financial ratios failed to explain the variablity in market risks significantly.