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

See all articles by Sotiris K. Staikouras

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

Date Written: 1996

Abstract

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

Staikouras, Sotiris, The Interest Rate Sensitivity of the UK Financial Intermediary (1996). Quantitative Analysis, Vol. 1, pp. 69-70, 2996. Available at SSRN: https://ssrn.com/abstract=679382

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
Greece

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