Bank Exposure to Interest Rate Risks During Financial Liberalization: Evidence from South Korea

35 Pages Posted: 25 Aug 2006

See all articles by Raj Aggarwal

Raj Aggarwal

University of Akron; Federal Reserve Banks - Federal Reserve Bank of Cleveland

Xinlei Shelly Zhao

Government of the United States of America - Office of the Currency Comptroller - Risk Analysis Division

Abstract

This study documents the changing impact of long and short term interest rate risks on the equity prices of banks in South Korea during the process of financial liberalization. Consistent with the presence of regulatory constraints, Korean bank equity returns are found to be sensitive to both anticipated and unanticipated changes in interest rates in the first period when banks were largely under government control. However, during our last period of liberalization, Korean bank equity returns were found to have a positive association only with unanticipated short-term interest rates. Consistent with the ability to manage other interest rate risks successfully, in this last liberalization period, Korean bank equity returns had no association with long-term or with anticipated short-term interest rates. In view of the continued interest in banking and financial market liberalization among many Asian, African, and formerly socialist countries including China, these results should be of much banking and policy interest.

Keywords: Banking, Financial Liberalization, Interest Rate Risk, Korea

JEL Classification: G21, G28, E44, L89

Suggested Citation

Aggarwal, Raj and Zhao, Xinlei, Bank Exposure to Interest Rate Risks During Financial Liberalization: Evidence from South Korea. Asia-Pacific Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=926399

Raj Aggarwal (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Xinlei Zhao

Government of the United States of America - Office of the Currency Comptroller - Risk Analysis Division ( email )

250 E Street, SW
Washington, DC 20219
United States

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