The sensitivity of US banks' stock returns to interest rate and exchange rate changes

Nathan Lael Joseph, Panayiotis Vezos

Research output: Contribution to journalArticle

14 Citations (Scopus)

Abstract

Purpose – The purpose of this paper is to investigate the impact of foreign exchange and interest rate changes on US banks’ stock returns. Design/methodology/approach – The approach employs an EGARCH model to account for the ARCH effects in daily returns. Most prior studies have used standard OLS estimation methods with the result that the presence of ARCH effects would have affected estimation efficiency. For comparative purposes, the standard OLS estimation method is also used to measure sensitivity. Findings – The findings are as follows: under the conditional t-distributional assumption, the EGARCH model generated a much better fit to the data although the goodness-of-fit of the model is not entirely satisfactory; the market index return accounts for most of the variation in stock returns at both the individual bank and portfolio levels; and the degree of sensitivity of the stock returns to interest rate and FX rate changes is not very pronounced despite the use of high frequency data. Earlier results had indicated that daily data provided greater evidence of exposure sensitivity. Practical implications – Assuming that banks do not hedge perfectly, these findings have important financial implications as they suggest that the hedging policies of the banks are not reflected in their stock prices. Alternatively, it is possible that different GARCH-type models might be more appropriate when modelling high frequency returns. Originality/value – The paper contributes to existing knowledge in the area by showing that ARCH effects do impact on measures of sensitivity.
Original languageEnglish
Pages (from-to)182-199
Number of pages18
JournalManagerial Finance
Volume32
Issue number2
DOIs
Publication statusPublished - 1 Feb 2006
Externally publishedYes

Keywords

  • Banks
  • Foreign exchange
  • Stock returns
  • United States of America

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