Risk-return Portfolio Level Trade-off for Czech Banks

This paper examines the validity of the risk -return trade-off for a sample of Czech banks over the period 2002-2022 by analysing the relationship between the bank risk and risk -adjusted returns. I find evidence of a significant negative association between the regulatory risk measure and risk -adjusted returns, indicating that the risk -return trade-off does not hold. Specifically, a 100 bps increase in the risk is associated with about a 7 bps decrease in the return on riskadjusted assets (RORWA) and an 11 bps decrease in the risk -adjusted net interest margin (rNIM) in the short run. The long -run effect is about double for RORWA and almost triple for rNIM. I also find evidence that during the period of low interest rates, the effect for RORWA was about a half smaller, albeit still negative. On the contrary, when non -regulatory measures of risk or risk -adjusted profitability are used, the risk -return trade-off seems to hold.