An Investigation of the Impact of Interest Rates and Interest Rate Volatility on Australian Financial Sector Stock Return Distributions

18 Pages Posted: 21 Jun 2005

See all articles by Robert W. Faff

Robert W. Faff

University of Queensland

Michael Kremmer

La Trobe University; Griffith University - School of Accounting, Banking and Finance

Allan Hodgson

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

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Abstract

This paper extends the existing literature by analyzing the dual impact of changes in the interest rate and interest rate volatility on the distribution of Australian financial sector stock returns. In addition, a multivariate GARCH-M model is used to analyze the impact of deregulation on the financial institutions sector. It was found that there is a consistent inter-temporal trade off between risk and return over the different regulatory periods. Moreover, finance corporations were found to be highly sensitive to new shocks across the financial sector and deregulation increased the risk faced by finance corporations and small banks - effectively increasing the required rate of return and explaining the continued rationalization of these sectors. Furthermore, deregulation has changed the fundamental relationship between interest rates and large bank stock excess returns from positive in the pre-deregulation period to negative in the post-deregulation period. This reflects the changing institutional environment from one of controlled credit rationing to a more competitive environment.

Suggested Citation

Faff, Robert W. and Kremmer, Michael and Hodgson, Allan C., An Investigation of the Impact of Interest Rates and Interest Rate Volatility on Australian Financial Sector Stock Return Distributions. Journal of Business Finance & Accounting, Vol. 32, No. 5-6, pp. 1001-1031, June 2005. Available at SSRN: https://ssrn.com/abstract=736415

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Michael Kremmer

La Trobe University ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

Griffith University - School of Accounting, Banking and Finance

Kessels Road
Nathan, Queensland 4111
Australia

Allan C. Hodgson

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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