Search results
1 – 10 of over 198000Low interest rates around the world due to adaptive monetary policy regulations for some time a source of concern for the banking sector and depositors of the bank. In this…
Abstract
Low interest rates around the world due to adaptive monetary policy regulations for some time a source of concern for the banking sector and depositors of the bank. In this environment, interest rates have raised concerns about nominal deposit interest rates which cannot be lowered below zero without destroying bank customers. Bank loans are becoming less vulnerable to lower interest rates on deposits approaching zero, indicating that the financial channel is weakened when interest rates are close to zero. Demographic pressures associated with longer life expectancy, China's gradual integration into global financial markets and changes in supply and asset requirements are attributed as reasons for low interest rates. Volatility of CPI inflation, interest rates on bank deposits attracting income tax and discontented depositors due to lower rates are cited as reasons for the suffering of bank depositors. This chapter thus discusses the impact of negative rate on economic growth and bank customers besides discussing the future trends of negative interest rates.
Details
Keywords
J. PAUL JOSHI and LARRY SWERTLOFF
The advent of derivatives and structured products has coincided with a proliferation of fixed income models used to analyze hedging, pricing, forecasting, and estimation for the…
Abstract
The advent of derivatives and structured products has coincided with a proliferation of fixed income models used to analyze hedging, pricing, forecasting, and estimation for the term structure of interest rates. This article evaluates five models Ho‐Lee (HL); Black‐Derman‐Toy (BDT); Vasicek; Cox‐Ingersoll‐Ross (CIR); and Heath‐Jarrow‐Morton (HJM) (see Exhibit 1) that are currently used by structured finance practitioners. We suggest which models are most appropriate for assets with different time horizons, interest rate sensitivities and cashflow properties. The authors link model selection to structured financial instruments with the singular focus on the trade‐off between model precision/complexity and calculation costs.
This study seeks to investigate the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European economies…
Abstract
Purpose
This study seeks to investigate the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European economies: France, Germany, Italy, and the UK.
Design/methodology/approach
The paper utilises the methodology of Campbell and Mei (1993) to decompose systematic risks into components attributable to news about future dividends (cash flows), real interest rates and excess returns.
Findings
In addition to significant market risk, the paper finds significant levels of exposure to exchange rate risk in industries in all four markets. Significant levels of interest rate risk are only identified in Germany and France. All three sources of risk contain significant information about future cash flows and excess returns.
Research limitations/implications
Future research could investigate the extent of exposure in other markets, or investigate whether the findings change at the firm level. Additionally it could be investigated whether recent asset pricing work such as Campbell and Vuolteenaho (2004) can be utilised to investigate this research problem.
Practical implications
The paper identifies which industry portfolios have significant exposures and decomposes these risks. This information is relevant for investors and portfolio managers, as well as financial management within the firm.
Originality/value
The paper utilises an alternative econometric methodology to investigate the extent of exposure to exchange rate and interest risks in industrial portfolios in four European markets.
Details
Keywords
Vector‐autoregression (VAR), integration, and cointegration models are used to investigate the causal relations, dynamic interaction, and a common trend between interest rates and…
Abstract
Vector‐autoregression (VAR), integration, and cointegration models are used to investigate the causal relations, dynamic interaction, and a common trend between interest rates and inflation in nine countries in the Pacific‐Basin. This paper finds that for all countries, short‐ and long‐term interest rates and the spread between the long‐term interest rates and inflation are non‐stationary I (1) processes. The nominal interest rates and inflation are not co‐integrated. In addition to this study’s inability to find a unidirectional causality between inflation and interest rates, when the VAR model is used, it also fails to find a consistent positive response either of inflation to shocks in interest rates or of interest rates to shocks in inflation in most of the countries studied. The VAR model results are consistent with the cointegration tests’ results, that is, nominal interest rates are poor predictors for future inflation in the Pacific‐Basin countries.
Details
Keywords
This paper aims to analyze Islamic rates of return, conventional interest rates in the Malaysian deposit markets, and Kuala Lumpur Interbank Offered Rate (KLIBOR) rates in the…
Abstract
Purpose
This paper aims to analyze Islamic rates of return, conventional interest rates in the Malaysian deposit markets, and Kuala Lumpur Interbank Offered Rate (KLIBOR) rates in the short-term money market from the view point of co-movement and transmission.
Design/methodology/approach
The non-stationary time series models such as cointegration and Granger causality tests are applied to analyze the daily data.
Findings
Islamic rates of return and conventional interest rates co-move in the Malaysian deposit market. The Islamic rates of return propel conventional interest rates in the three-, six-, and 12-month maturities. Islamic rates of return and conventional interest rates form a short-term money market with KLIBOR rates.
Research limitations/implications
The author analyzes econometrically the sample period from May 16, 2005 to January 12, 2012. This paper concentrates on the period after the development of Islamic banking in Malaysia.
Practical implications
Islamic and conventional deposit markets are competitive in Malaysia; in particular, the competition in the one-month deposit market is very keen. Islamic rates of return have more impact on the formation of short-term interest rates than conventional interest rates.
Originality/value
This paper makes three contributions to the related literatures. First, it uses daily data in the maturities of one month, three months, six months and 12 months for its analyses. Second, it uses the Granger causality method of Toda and Yamamoto to avoid the issue of the non-stationarity of the data. The results of the Granger causality tests in this paper are different from related literatures. Third, this paper focuses on the relationship of KLIBOR rates and Islamic rates of return, and of KLIBOR rates and conventional interest rates.
Details
Keywords
Raymond A.K. Cox and Rose M. Prasad
The values of assets and liabilities of financial institutions are subject to fluctuations in interest rate. The differential impact in interest rate changes between assets and…
Abstract
The values of assets and liabilities of financial institutions are subject to fluctuations in interest rate. The differential impact in interest rate changes between assets and liabilities is referred to, in banking, as interest rate risk. Of all threats to bank competitiveness this risk dwarfs all others. Banks traditionally have dealt with interest rate risk by restructuring their loan portfolios. In this paper, we construct a model to measure interest rate risk, called the Degree of Interest Rate Sensitivity (DIRS), and demonstrate its effectiveness for banks to compete. The degree of interest rate risk is of vital importance to the commercial bank which has to know its level and degree of interest‐rate risk in order to prudently manage it. Failure to adequately manage interest rate risk can lead to bankruptcy or, at the least, a lack of competitiveness.
Muhammad Tariq, Muhammad Azam Khan and Niaz Ali
This study aims to investigate the effect of monetary policy on housing prices for US economy. It specifically examines whether nominal or real interest rates are the key drivers…
Abstract
Purpose
This study aims to investigate the effect of monetary policy on housing prices for US economy. It specifically examines whether nominal or real interest rates are the key drivers behind fluctuations in housing prices in US.
Design/methodology/approach
Monthly data from January 1991 to July 2023 and various appropriate analytical tools such as unit root tests, Johansen’s cointegration test, vector error correction model (VECM), impulse response function and Granger causality test were applied for the data analysis.
Findings
The Johansen cointegration findings reveal the presence of a long-term relationship among the variables. VECM results indicate a negative correlation between nominal and real interest rates and housing prices in both the short and long terms, suggesting that a strict monetary policy can help in controlling the housing price increase in the USA. However, housing prices are more responsive to changes in nominal interest rates than to real interest rates. Additionally, the study reveals that the COVID-19 pandemic contributed to the upsurge in housing prices in the USA.
Originality/value
This study contributes by examining the role that nominal or real interest rates play in shaping housing prices in the USA. Moreover, given the recent significant upsurge in housing prices, this study presents a unique opportunity to investigate whether these price increases are influenced by the Federal Reserve's monetary policy decisions regarding nominal or real interest rates. Additionally, using monthly data, this study provides a deeper understanding of the fluctuations in housing prices and their connection to monetary policy tools.
Details
Keywords
Rosaria Rita Canale and Rajmund Mirdala
The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II…
Abstract
The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II. Globalization, liberalization, integration, and transition processes generally shaped the crucial milestones of the macroeconomic development and substantial features of economic policy and its framework in Europe. Policy-driven changes together with variety of exogenous shocks significantly affected the key features of macroeconomic environment on the European continent that fashioned the framework and design of monetary policies.
This chapter examines the key basis of the central bank’s monetary policy on its way to pursue and preserve the internal and external stability of the purchasing power of money. Substantial elements of the monetary policy like objectives and strategies are not only generally introduced but also critically discussed according to their accuracy, suitability, and reliability in the changing macroeconomic conditions. Brief overview of the Eurozone common monetary policy milestones and the past Eastern bloc countries’ experience with a variety of exchange rate regimes provides interesting empirical evidence on origins and implications of vital changes in the monetary policy conduction in Europe and the Eurozone.
Details
Keywords