The Interest Rate Risk Exposure of Financial Intermediaries: A Review of the Theory and Empirical Evidence

34 Pages Posted: 12 Oct 2003

See all articles by Sotiris K. Staikouras

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School


The paper surveys current and previous research on financial institutions' interest rate risk exposure. The implications of such exposure are discussed and motivating insights are emphasized. Various theoretical frameworks and models are presented. For each one an overview of the studies and any relationship to each other is provided. In a cross-industry analysis, other idiosyncratic risk factors are considered and their importance is delineated. A number of empirical relations are established. More specifically, there is an inverse relationship between interest rate changes and common stock returns of financial institutions. The intermediaries' apparent yield sensitivity is mainly attributed to the duration gap inherent in their balance sheet structure. Furthermore, the aforesaid equity sensitivity due to other possible dynamics such as dividend yield, unanticipated inflation and regulatory lags is also considered. Changes in economic regimes have altered volatility in market yields with a subsequent effect, positive or negative, on financial intermediaries' equity returns. The issue of the risk-return compensation is further analyzed, and findings suggest that the interest rate risk is priced by capital markets. Finally, a few other issues are identified as avenues for future research.

Suggested Citation

Staikouras, Sotiris, The Interest Rate Risk Exposure of Financial Intermediaries: A Review of the Theory and Empirical Evidence. Available at SSRN:

Sotiris Staikouras (Contact Author)

City University - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ALBA Graduate Business School ( email )

Athinas Ave. & 2A Areos Str.
Vouliagmeni 166 71, Athens

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