Interest Rate Changes and Common Stock Returns of Financial Institutions: Evidence from the UK

European Journal of Finance, Vol. 4, pp. 113-127, 1998

Posted: 30 Mar 2005

See all articles by Sotiris K. Staikouras

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

Elias Dinenis

Cass Business School, City University, London

Abstract

The objective of this paper is to examine the impact of interest rate changes on the common stock returns of portfolios of financial institutions in the UK. The five groups of financial institutions examined are banks, insurance companies, investment trusts, property investment companies and finance firms. In addition, a wide sample of nonfinancial firms is considered for comparison purposes. A two-index model is employed to test the effect of both current and unanticipated interest rate changes. An element of volatility in market yields is also introduced in a three-index model to measure the effect of variability in interest rates on the returns of these financial intermediaries. Two main implications emerge from the present paper for both financial and nonfinancial firms. First a significant negative relationship seems to exist between the common stock returns and the changes in interest rates. Second common stock retruns and variability of interest rates are related with a significant positive coefficient.

Keywords: Financial institutions, stock returns, unexpected interest rate changes, interest rate volatility

JEL Classification: C22, G12, G20, G21

Suggested Citation

Staikouras, Sotiris and Dinenis, Elias, Interest Rate Changes and Common Stock Returns of Financial Institutions: Evidence from the UK. European Journal of Finance, Vol. 4, pp. 113-127, 1998, Available at SSRN: https://ssrn.com/abstract=679402

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

Elias Dinenis

Cass Business School, City University, London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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