Sensitivity of Bank Equity Returns to the Level and Volatility of Interest Rates

Managerial Finance; 1995; 21, 7; p. 57-77

Fox School of Business Research Paper

21 Pages Posted: 17 Jun 2014

See all articles by Iqbal Mansur

Iqbal Mansur

Widener University - School of Business Administration

Elyas Elyasiani

Temple University - Department of Finance

Date Written: 1995

Abstract

This study attempts to determine whether the level and volatility of interest rates affect the equity returns of commercial banks. Short-term, intermediate-term, and long-term interest rates are used. Volatility is defined as the conditional variance of respective interest rates and is generated by using the ARCH estimation procedure. Two sets of models are estimated. The basic models attempt to determine the effect of contemporaneous and lagged interest rate volatility on bank equity returns, while the extended models incorporate additional contemporaneous macroeconomic variables. Contemporaneous interest rate volatility has little explanatory power, while lagged volatilities do possess some explanatory power, with the lag length varying depending on the interest rate series used and the time period examined. The results from the extended model suggest that the long-term interest rate affects bank equity returns more adversely than the short-term or the intermediate-term interest rates. The findings establish the relevance of incorporating macroeconomic variables and their volatilities in models determining bank equity returns.

Suggested Citation

Mansur, Iqbal and Elyasiani, Elyas, Sensitivity of Bank Equity Returns to the Level and Volatility of Interest Rates (1995). Managerial Finance; 1995; 21, 7; p. 57-77; Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2451188

Iqbal Mansur

Widener University - School of Business Administration ( email )

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

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)

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