Abstract
Commercial banks occupy a significant position in the transmission of monetary policy through the financial market. Furthermore, commercial banks have assets and liabilities which are interest rate sensitive, and their stock returns are believed to be particularly responsive to changes in the central bank base lending rates. Therefore, this study investigated the sensitivity of central bank interest rate changes on stock returns of listed commercial banks in Kenya for nine year period, from 2006 to 2014. The study used a hybrid of cross sectional and longitudinal quantitative surveys method, applying GMM panel data regression model on the secondary data from the 11 listed commercial banks in Kenya. The study found out that there is a significant strong positive sensitivity of average annual changes in central bank interest rates (CBR) on the stock returns of the listed commercial banks in Kenya, from 2006 to 2014, measured using CAPM. Hence, listed commercial banks’ managers in Kenya should monitor, keenly, the changes in the central bank interest rates and make investor related decisions accordingly.
Highlights
The impact of monetary policy, such as the central bank interest rate sensitivity, on banks’ stock market returns has been a main concern for bank managers, regulatory authorities, academic communities and investors
It is interesting to determine the sensitivity of central bank interest rate (CBR) changes on capital asset pricing model (CAPM) return of listed commercial banks in Kenya. 3.4 The Sensitivity of Central Bank Interest Rate Changes on Stock Returns of Listed Commercial Banks in Kenya The main objective of the study was to investigate the sensitivity of central bank interest rate changes on stock returns of listed commercial banks in Kenya for the nine year period, from 2006 to 2014
Yin and Yang (2013) argued that the existing literature on commercial bank stock returns and changes in the central bank interest rate changes suggests that the influence of central bank interest rate changes on commercial bank stock returns vary across banks, depending on specific bank characteristics
Summary
The impact of monetary policy, such as the central bank interest rate sensitivity, on banks’ stock market returns has been a main concern for bank managers, regulatory authorities, academic communities and investors. According to Fiordelisi and Molyneux (2010) bank common stock prices and bank stock returns, depend on both macroeconomic and bank-specific factors Among these factors, a crucial role is played by changes in monetary policy, such as central bank interest rate changes, because of the interest rate sensitivity of both bank assets and liabilities (Yin & Yang, 2013). This study attempted to analyse the extent of stock market returns of listed commercial banks in Kenya over the nine year period, from 2006 to 2014 using CAPM, and determine how stock returns relates with the changes of central bank interest rates. Though the weighted average of commercial banks’ lending rates have been increasing over the study period, from the lowest of 13.32% in 2007 to 20.04% in 2011, the overall domestic credit has been grown by 124%, from Kshs. 671 Billion in 2007
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