Interest Rate Sensitivity of Bank Stock Returns: Specification Effects and Structural Changes

Abstract

In this paper the interest rate sensitivity of bank stock returns under alternative econometric specifications and the changes in the sensitivity over time are studied. Results indicate that the sensitivity depends on the econometric specification and the period considered. Bank stock returns show a sensitivity to long-term government security returns and innovations, but not to short-term government security returns and innovations except under one specification. Since 1980, banks seem to have reduced their interest rate risk exposure. Finally, while long-term returns are positively associated with stock returns, short-term returns show a positive association only since 1980.

Real-Estate Risk Effects on Financial Institutions’ Stock Return Distribution: a Bivariate GARCH Analysis

“…3 The general consensus is that commercial bank stock returns are negatively related to changes in interest rates and the sensitivity to the long-term rate, though small, is stronger than to the short-term rate. Bae (1990), Yourougou (1990, Akella and Chen (1990), Kane and Unal (1988), Kwan (1991) and Akella and Greenbaum (1992) provide additional evidence reinforcing this conclusion. Song (1994), and Elyasiani and Mansur (1998, 2003, reach similar conclusions using ARCH and GARCH methodologies.…”

Impacto del riesgo de interés sobre las acciones del sector bancario español

“…El parámetro η resulta negativo y signifi cativo en la gran mayoría de los casos al emplear los cambios de los tipos a largo y a corto plazo, si bien los resultados no son tan concluyentes al considerar el spread de tipos. Esta evidencia es consistente con la literatura previa (véase, por ejemplo, Akella y Chen, 1990;Kwan, 1991;Faff y Howard, 1999;o Brewer et al, 2007), sugiriendo que la sensibilidad de las acciones bancarias ante los movimientos de los tipos de interés se ha debilitado considerablemente a partir de la entrada en funcionamiento del euro.…”

Bank Exposure to Interest Rate Risks During Financial Liberalization: Evidence from South Korea

“…Further, findings regarding the nature of bank equity sensitivity to interest rates seem to vary. Akella and Chen (1990) report that bank stocks are sensitive to long-term interest rates but not to short-term interest rates. Neuberger (1991) reports that over the 1979-1990 period the influence of long term interest rates on U.S. bank stocks has been declining.…”

“…Yields on three-year Treasury securities are used to generate unexpected interest rate changes using an ARIMA model for a two-factor (market and interest rate) asset pricing model. Akella and Chen (1990) examine interest rate sensitivity of 23 bank stock returns using a two factor pricing model from 1974 to 1984 under alternative methods for orthogonalizing variables. Also using a two factor model, Robinson (1995) documents that the sensitivity of U.S. bank equity returns to unexpected changes in both short and long term interest rates has changed over time and with the regulatory environment.…”