BANK STOCK RETURNS, INTEREST RATE CHANGES, AND THE REGULATORY ENVIRONMENT: NEW INSIGHTS FROM JAPAN

Abstract

This paper re-examines the relationship between interest rate changes and bank stock returns using the Japanese experience. Specifically, we test the relationship under two different regulatory regimes. During the first regime (1975–1983), there was strict regulation of the financial system and significant oversight of bank activities, whereas the latter regime (1984–1994) represented a period of financial liberalization and interest rate deregulation. The results presented here indicate that interest rate changes negatively affected Japanese bank equity in the post-regulatory period, but not during the period of heavy regulation. Additionally, we also find that most of the short-term rate effects were channeled through volatility proxies while long-term effects were channeled through yield spread and shape effects. These findings represent new and important insights into the relationship between interest rate changes and bank stock returns.

Citation

Paul Broussard, J., Kim, K.A. and Limpaphayom, P. (2003), "BANK STOCK RETURNS, INTEREST RATE CHANGES, AND THE REGULATORY ENVIRONMENT: NEW INSIGHTS FROM JAPAN", Choi, J.J. and Hiraki, T. (Ed.) The Japanese Finance: Corporate Finance and Capital Markets in ... (International Finance Review, Vol. 4), Emerald Group Publishing Limited, Leeds, pp. 279-302. https://doi.org/10.1016/S1569-3767(03)04014-7