Abstract
We show that Financial Services stock returns in Canada are covariance nonstationary with respect to any benchmark variable and vary negatively with interest rate levels. We find that the conditional correlation between financial services stock returns and the market returns varies directly and monotonically with market volatility. This result is robust to monetary regime shifts and other sources of high volatility. These findings, combined with those of Kane and Unal (1988) for the U.S., cast considerable doubt on the constant coefficient Two-Index model and its variants, to provide reliable estimates of usual risk measures.
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