Journal of Applied Finance & Banking

Inflation and Bank Valuations: Evidence of a Nonlinear Relationship

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• Abstract

   

  This paper investigates the relationship between inflation and bank valuations. Using a panel of U.S. banks from 2000 to 2024, we find evidence of an inverted U-shaped relationship between inflation and bank valuations. Specifically, inflation is positively associated with bank valuations when it is below a threshold of approximately 3%, but the relationship becomes negative once inflation exceeds the threshold. These results remain qualitatively unchanged when we address the potential endogeneity of inflation using an instrumental variable approach. Our findings suggest that banks are valued most highly during periods of moderate inflation.

   

  JEL classification numbers: G21, E31.

  Keywords: Bank, Inflation, Valuation.