The Interest Rate Sensitivity of the UK Financial Intermediary
Quantitative Analysis, Vol. 1, pp. 69-70, 2996
Posted: 30 Mar 2005 Last revised: 8 Apr 2008
Date Written: 1996
This paper explores the relationship between short-term interest rates and the equity returns of the UK financial intermediaries. Based on the arbitrage pricing theory, the present study seeks to answer the sensitivity and pricing questions. The former is tested with a linear two-index model attempting to identify any interest rate risk exposure of these stock returns. The later, however, is examined using a nonlinear multivariate analysis based on the SURE model by imposing cross- and within-equation constraints on the estimated parameters. The econometric analysis unveils a significant negative interest rate effect and the existence of a risk premium incorporated in the expected returns of portfolios consisting of these stocks.
Keywords: Financial Institutions, Stock Returns, Unexpected Interest Rate Changes, Interest Rate Volatility
JEL Classification: C22, G12, G20, G21
Suggested Citation: Suggested Citation