Banking Stock Returns and Their Relationship to Interest Rates and Exchange Rates: Australian Evidence

University of Wollongong in Dubai Working Paper No. 5-2003

35 Pages Posted: 13 Oct 2003

See all articles by John L. Simpson

John L. Simpson

Curtin University - Centre for Research in Applied Economics

John P. Evans

Curtin University - Centre for Research in Applied Economics

Date Written: September 2003

Abstract

Banks in Australia, as agents of the Central Bank, are key players in the implementation of exchange rate and monetary policies. The purpose of this study is to examine dynamic interactions among, and the long-term equilibrium relationships between, bank stock returns and the key macroeconomic and monetary policy variables in interest rates and exchange rates. The concern is whether or not current economic indicators, as reflected in interest rates and exchange rates, can explain banking stock market returns or vice versa. The statistical models used include regression models, cointegration tests and Granger causality tests from vector autoregressive models. The study finds no evidence that Australia's bank stock market returns form a cointegrating relationship with short- and long-term interest rates and exchange rates over the period of study and thus conclusions may not be drawn relating to long-term rational expectations in the Australian banking market. Evidence is presented that causality runs from bank stock returns to interest rates and exchange rates. This indicates that Australian monetary authorities, over the past decade, appear to have placed strong reliance on the health and performance of the banking and financial sector as they formulate monetary and exchange rate policy settings.

Keywords: Banking, stock market returns, interest rates, exchange rates, cointegration

JEL Classification: E44

Suggested Citation

Simpson, John L. and Evans, John Philip, Banking Stock Returns and Their Relationship to Interest Rates and Exchange Rates: Australian Evidence (September 2003). University of Wollongong in Dubai Working Paper No. 5-2003, Available at SSRN: https://ssrn.com/abstract=443302 or http://dx.doi.org/10.2139/ssrn.443302

John L. Simpson

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845
Australia

John Philip Evans (Contact Author)

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845
Australia

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