INTERNATIONAL FINANCIAL MARKETS

International Financial Markets and Institutions



International Financial Markets and Institutions

Introduction

Lloyds Banking Group plc (Lloyds or the group) is a leading UK based financial services group, offering a wide range of banking and financial services in the UK and a limited number of locations overseas. HSBC is Europe's biggest bank in terms of lending assets and market capitalization. In the UK, the group has a leading direct banking business. It also has leading market positions in financial services and several consumer finance operations. The group leverages its market leadership in geographies and product segments to gain a competitive advantage. Following global financial crisis, banking sector has undergone a difficult time which was exaggerated further by weak economic conditions and increase competition. In result, it has affected the banks' revenues and profitability. In this report, we have analyzed the stock of these two leading banks in terms of risk and return. FTST 100 has been used an benchmark for the purpose of analysis. Sampling Frequency

We have taken the closing prices of both stocks along with FTSE 100 for the period starting from Jan 1st, 2007 to Dec 31st, 2010. For simplification purpose, we have process daily price into weekly data. In the figure above, we have employed statistical Software to find out the sampling frequency for the period mentioned before. The graphs allow us to see lognormal distribution of returns for both stocks.

Descriptive Statistics

FTSE100

Lloyds

HSBC

 

 

 

 

 

 

Mean

0.082%

Mean

1.784%

Mean

0.310%

Standard Error

0.00240

Standard Error

0.00918

Standard Error

0.00368

Median

-0.210%

Median

0.0050

Median

0.0023

Standard Deviation

3.461%

Standard Deviation

13.246%

Standard Deviation

5.305%

Sample Variance

0.0012

Sample Variance

0.0175

Sample Variance

0.0028

Kurtosis

13.97120

Kurtosis

19.55406

Kurtosis

11.45521

Skewness

1.91219

Skewness

3.06867

Skewness

1.84363

Range

0.36701

Range

1.45239

Range

0.52711

Minimum

-11.41%

Minimum

-45.64%

Minimum

-16.54%

Maximum

25.29%

Maximum

99.59%

Maximum

36.17%

Sum

17.027%

Sum

371.069%

Sum

64.486%

Count

208

Count

208

Count

208



Commentary

The descriptive statistics of both stocks gives a very good picture when compared to our benchmark (FTSE 100 index). However, there is a clear contract between the two stocks. HSBC has continued to remain stable during the period which is evident from the standard deviation of 5.3% which is very close to market average of 3.46%. In contrast, Lloyds share has witnessed high standard deviation during the same period which marked at 13.24%. Standard deviation represents risk therefore, in terms of risk, Lloyds has been relatively risk stock as compared to the HSBC.

However, it is necessary to compare the risk with the average return of stocks. As we know, higher the risk, higher the return. This seems to be true in our subject stocks. HSBC being less risky is also yielding lower returns during the four years (mean of 0.310%). On the other hand, Lloyds being a riskier stock is also yielding higher return and during the period, its average yield during the period has been 1.784%. Our benchmark reflects the least risky investment for the investors and consequently, also yielding means return of only 0.082% during the same period which is lowest among the three.

When it comes to descriptive statistics, an important indicator used to analyze the stock return is Kurtosis. In all the three cases, Kurtosis has been very high and greater than 3. It shows that investment in the stocks can yield high returns as well as high losses. The closing price of both stocks against the FTSE 100 is shown in ...