Exploring the effect of market risks on bank profitability: Evidence from Jordan
-
DOIhttp://dx.doi.org/10.21511/bbs.17(1).2022.16
-
Article InfoVolume 17 2022, Issue #1, pp. 186-195
- Cited by
- 962 Views
-
950 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This paper observes the dynamic impact of market risks on the profitability of banks listed on the Amman Stock Exchange (ASE) from 2010 to 2018 in Jordan. To identify the link, the relevant data were retrieved from the annual statements of Jordanian banks and one-step Generalized Method of Moments (GMM) approach was employed to diagnose the error regarding endogeneity. The results of the applied methodology showed that market risks impacted the profitability of Jordanian banks. Furthermore, the study also presented factors that affected the banks’ profitability, such as capitalization and bank size. The previous year profitability has a positive effect on the next year profitability. Moreover, stock market returns (SMRs) directly affect ROA and ROE because when SMRs enhances, bank profitability will increase. Bank managers should ponder the volatility of the market risk while enhancing the profitability of a bank. This relationship of the variables regarding Jordanian banks listed on the ASE was not considered before in the financial economics literature. Recommendations were also provided for Jordanian bank managers to mitigate market risks.
- Keywords
-
JEL Classification (Paper profile tab)G14, G32, G21
-
References40
-
Tables2
-
Figures0
-
- Table 1. Descriptive statistics
- Table 2. Regression analysis
-
- Abdellahi, S. A., Mashkani, A. J., & Hosseini, S. H. (2017). The effect of credit risk, market risk, and liquidity risk on financial performance indicators of the listed banks on Tehran Stock Exchange. American Journal of Finance and Accounting, 5(1), 20-30.
- Abubakar, U. Y. (2020). Effects of Exchange Rate Volatility On Financial Performance of Deposit Money Banks in Nigeria. Edo Journal of Arts, Management and Social Sciences, 2(1), 121-139.
- Agusman, A., Monroe, G. S., Gasbarro, D., & Zumwalt, J. K. (2008). Accounting and capital market measures of risk: Evidence from Asian banks during 1998–2003. Journal of Banking & Finance, 32(4), 480-488.
- Ahmed, A., Rehan, R., Chhapra, I. U., & Supro, S. (2018). Interest rate and financial performance of banks in Pakistan. International Journal of Applied Economics, Finance and Accounting, 2(1), 1-7.
- Al-Jarrah, I. (2012). Evaluating the Riskiness of the Banking Sector of Jordan. European Journal of Economics, Finance and Administrative Sciences, 48, 88-95.
- Al-Rdaydeh, M., Almansour, A. Y., & Al-Omari, M. A. (2018), Moderating effect of competitive strategies on the relation between financial leverage and firm performance: Evidence from Jordan. Business and Economic Horizons, 14(3), 626-641.
- Al-Rdaydeh, M., Matar, A., & Alghzwai, O. (2017). Analyzing the effect of credit and liquidity risks on profitability of conventional and Islamic Jordanian Banks. International Journal of Academic Research in Business and Social Sciences, 7(12), 1145-1155.
- Al-Rdaydeh, M., Muhammad, J., & Haslindar, I. (2019), Bank Financing and Firm Growth: The Role of Islamic Bank Financing. International Journal of Economics and Financial Issues, 9(4), 181-188.
- Bird, A., & Skinner, T. H. (2005). Enterprise risk management not for you? Wrong. American Banker, 170(67), 10.
- Bond, S. (2002). Dynamic panel data models: a guide to micro data methods and practice. Portuguese Economic Journal, 1(2), 141-162.
- Bühler, W., & Prokopczuk, M. (2010). Systemic risk: is the banking sector special? SSRN.
- Chepkemoi, B. P., Ndung’u, S., & Kahuthia, J. (2019). Market risk and financial performance of listed non-bank financial institutions in Kenya. International Academic Journal of Economics and Finance, 3(3), 343-355.
- De Leon, M. V. (2020). The impact of credit risk and macroeconomic factors on profitability: the case of the ASEAN banks. Banks and Bank Systems, 15(1), 21.
- Elyasiani, E., & Mansur, I. (2005). The Association between market and exchange rate risks and accounting variables: A GARCH model of the Japanese banking institutions. Review of Quantitative Finance and Accounting, 25, 183-206.
- Fahrul, M., & Rusliati, E. (2016). Credit Risk, Market Risk, Operational Risk and Liquidity Risk on Profitability of Banks in Indonesia. Trikonomika, 15(2), 78-88.
- Hamouri, B., Al-Rdaydeh, M., & Ghazalat, A. (2018). Effect of financial leverage on firm growth: Empirical evidence from listed firms in Amman stock exchange. Investment Management and Financial Innovations, 15(2), 154-164.
- IMF. (2003). Financial Development in the Middle East and North Africa.
- Judson, R. A., & Owen, A. L. (1999). Estimating dynamic panel data models: a guide for macroeconomics. Economics Letters, 65(1), 9-15.
- Kalsoom, A., & Khurshid, M. K. (2016). A Review of Impact of Interest Rate Spread on Profitability. Journal of Poverty, Investment and Development, 25, 29-32.
- Kassi, D. F., Rathnayake, D. N., Louembe, P. A., & Ding, N. (2019). Market risk and financial performance of non-financial companies listed on the Moroccan stock exchange. Risks, 7(1), 20.
- Khrawish, H. A. (2011). Determinants of Commercial Banks Performance: Evidence from Jordan. International Research Journal of Finance and Economics, 5(5), 19-45.
- Koch, T., & MacDonald, S. (2014). Bank management. Nelson Education.
- Kosmidou, K., Tanna, S., & Pasiouras, F. (2005). Determinants of profitability of domestic UK commercial banks: panel evidence from the period 1995–2002 (Working Paper Series No. RP08-4).
- Lehar, A. (2005). Measuring systemic risk: A risk management approach. Journal of Banking & Finance, 29(10), 2577-2603.
- Maniagi, G. M. (2018). Influence of Financial Risk on Financial Performance of Commercial Banks in Kenya (Doctoral Thesis). Jomo Kenyatta University of Agriculture and Technology.
- Matar, A., Al-Rdaydeh, M., Al-Shannag, F., & Odeh, M. (2018). Factors affecting the corporate performance: Panel data analysis for listed firms in Jordan. Academy of Accounting and Financial Studies Journal, 22(6), 1-10.
- Matar, A., Al-Shannag, F., & Al-Rdaydeh, M. (2020) Corporate Social Responsibility Spending and Financial Performance: Generalised Method of Moments. International Journal of Innovation, Creativity and Change, 13(7), 457-475.
- Muriithi, J. G., Muturi, W. M., & Waweru, K. M. (2016). The Effect of Market Risk on Financial Performance of Commercial Banks in Kenya. Journal of Finance and Accounting, 4(4), 225-233.
- Musah, A., Anokye, F. K., & Gakpetor, E. D. (2018). The Impact of Interest Rate Spread on Bank Profitability in Ghana. European Journal of Business, Economics and Accountancy, 6(1), 27-39.
- Nekhili, R. (2020). Systemic risk and interconnectedness in Gulf Cooperation Council banking systems. Banks and Bank Systems, 15(1), 158-166.
- Ngalawa, J., & Ngare, P. (2013). Interest rate risk management for commercial banks in Kenya. Journal of Economics and Finance, 4, 11-21.
- Nimalathasan, B., & Pretheepkantha, P. (2012), Systematic Risk Management and Profitability. A case study of selected financial Institutions in Sri Lanka. Global journal of Management and business Research, 12(17).
- Okpara, G. (2011). Bank reforms and the performance of the Nigerian Banking Sector: An empirical analysis. International Journal of Current Research, 2(1), 142-153.
- Owusu-Antwi, G., Banerjee, R., & Antwi, J. (2017). Interest rate spread on bank profitability: The case of Ghanaian banks. Journal of Accounting, Business and Finance Research, 1(1), 34-45.
- Shair, F., Sun, N., Shaorong, S., Atta, F., & Hussain, M. (2019). Impacts of risk and competition on the profitability of banks: Empirical evidence from Pakistan. PloS one, 14(11), e0224378.
- Tafri, F. H., Hamid, Z., Meera, A. K. M., & Omar, M. A. (2009). The impact of financial risks on profitability of Malaysian commercial banks: 1996–2005. International Journal of Social, Human Science and Engineering, 3(6), 268-282.
- Tan, Y. (2016). The impacts of risk and competition on bank profitability in China. Journal of International Financial Markets, Institutions and Money, 40, 85-110.
- Worzala, E. (1995). Currency risk and international property investments. Journal of Property valuation and Investment, 13(5), 23-38.
- Zeitun, R. (2012). Determinants of Islamic and Conventional Banks Performance in GCC Countries Using Panel Data Analysis. Global Economy and Finance Journal, 5(1), 53-72.
- Zulfiqar, Z., & Din, N. U. (2015). Inflation, Interest rate and firms’ performance: the evidences from textile industry of Pakistan. International Journal of Arts and Commerce, 4(2), 111-115.