Sensitivity of the Bank Stock Returns Distribution to Changes in the Level and Volatility of Interest Rate: A GARCH-M Model

Journal of Banking & Finance 22 (1998) 535-563

Fox School of Business Research Paper

29 Pages Posted: 17 Jun 2014

See all articles by Elyas Elyasiani

Elyas Elyasiani

Temple University - Department of Finance

Iqbal Mansur

Widener University - School of Business Administration

Date Written: March 11, 1995

Abstract

The objective of this paper is to employ the generalized autoregressive conditionally heteroskedastic in the mean (GARCH-M) methodology to investigate the effect of interest rate and its volatility on the bank stock return generation process. This framework discards the restrictive assumptions of linearity, independence, and constant conditional variance in modeling bank stock returns. The model presented here allows for shifts in the volatility equation in response to the changes in monetary policy regime in 1979 and 1982 to be estimated. ARCH, GARCH, and volatility feed back effects are found to be significant. Interest rate and interest rate volatility are found to directly impact the first and the second moments of the bank stock returns distribution, respectively. The latter also affects the risk premia indirectly. The degree of persistence in shocks is substantial for all the three bank portfolios and sensitive to the nature of the bank portfolio and the prevailing monetary policy regime.

Keywords: Bank stocks, GARCH, Interest rate risk

JEL Classification: G12, G21, C52

Suggested Citation

Elyasiani, Elyas and Mansur, Iqbal, Sensitivity of the Bank Stock Returns Distribution to Changes in the Level and Volatility of Interest Rate: A GARCH-M Model (March 11, 1995). Journal of Banking & Finance 22 (1998) 535-563; Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2451185

Elyas Elyasiani (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-5881 (Phone)
215-204-5698 (Fax)

Iqbal Mansur

Widener University - School of Business Administration ( email )

3800 Vartan Way
PO Box 69381
Harrisburg, PA 17106-9381
United States

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