Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany

31 Pages Posted: 28 Dec 2009

See all articles by Marc-Gregor Czaja

Marc-Gregor Czaja

Allianz Investment Management

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg

Marco Wilkens

University of Augsburg

Date Written: 2008

Abstract

The interest rate sensitivity of stock returns of financial and non-financial corporations is a well-known phenomenon. However, only little is known about the part of total stock returns that is attributable to the compensation an investor receives for being exposed to interest rate risk when investing in equity securities. We pursue here a benchmark portfolio approach, constructing benchmark portfolios having the same interest rate risk exposure as a particular stock. By studying the time series of returns of these asset-specific benchmarks, we find: i) Regardless of the industry considered, the interest rate risk benchmarks of German corporations have mostly earned a significantly positive reward. ii) Returns of interest rate risk benchmarks of financial institutions exceeded significantly those of non-financial corporations. iii) An investor willing to bear nothing but the average interest rate risk of German financial institutions would have earned a mean return of about or even exceeding 70% of the corresponding total stock returns. iv) Returns of the interest rate risk benchmarks of the German insurance sector were significantly higher than those of German banks, which seems to contradict conventional market wisdom that insurances hedge interest rate risks.

Suggested Citation

Czaja, Marc-Gregor and Scholz, Hendrik and Wilkens, Marco, Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany (2008). European Financial Management, Vol. 16, Issue 1, pp. 124-154, January 2010. Available at SSRN: https://ssrn.com/abstract=1527932 or http://dx.doi.org/10.1111/j.1468-036X.2008.00455.x

Marc-Gregor Czaja (Contact Author)

Allianz Investment Management ( email )

Reinsburgstr. 19
Stuttgart, 70178
Germany
+49-711-663-2122 (Phone)
+49-711-663-82122 (Fax)

HOME PAGE: http://www.allianz.com

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
2
Abstract Views
743
PlumX Metrics