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Bank stock return sensitivities to the long‐term and short‐term interest rates: a multivariate GARCH spproach

Elyas Elyasiani (Professor of Finance, Fox School of Business and Management, Temple University, Philadelphia, PA 19122)
Iqbal Mansur (Professor of Finance, School of Business Administration, Widener University, One University Place, Chester, PA 19013)

Managerial Finance

ISSN: 0307-4358

Article publication date: 1 September 2004

Abstract

This study employs a multivariate GARCH model to investigate the relative sensitivities of the first and the second moment of bank stock return distribution to the short‐term and long‐term interest rates and their respective volatilities. Three portfolios are formed representing the money center banks, large banks, and small banks, respectively. Estimation and testing of hypotheses are carried out for each of the three portfolios separately. The sample includes daily data over the 1988‐2000 period. Several hypotheses are tested within the multivariate GARCH specification. These include the hypotheses of: (i) insensitivity of bank stock return to the changes in the short‐term and long‐term interest rates, (ii) insensitivity of bank stock returns to the changes in the volatilities of short‐term and long‐term interest rates, and (iii) insensitivity of bank stock return volatility to the changes in the short‐term and long‐term interest rate volatilities. The findings indicate that short‐term and long‐term interest rates and their volatilities do exert significant and differential impacts on the return generation process of the three bank portfolios. The magnitudes and the direction of the effect are model‐specific namely that they depend on whether the short‐term or the long‐term interest rate level is included in the mean return equation. These findings have implications on bank hedging strategies against the interest rate risk, regulatory decisions concerning risk‐based capital requirement, and investor’s choice of a portfolio mix.

Keywords

Citation

Elyasiani, E. and Mansur, I. (2004), "Bank stock return sensitivities to the long‐term and short‐term interest rates: a multivariate GARCH spproach", Managerial Finance, Vol. 30 No. 9, pp. 32-55. https://doi.org/10.1108/03074350410769263

Publisher

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Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited