Interest Rate Sensitivity Research Articles

The Analysis of Fundamental Variables and Macro Economic Variables in Predicting Financial Distress

Financial distress is a condition where the company is experiencing financial difficulties prior to bankruptcy. This study aims to identify and explain the influence of the fundamental variables and macroeconomic variables in predicting the probability of financial distress. Based on the eight variables used, current ratio, debt to assets ratio, return on equity and total asset turnover ratio is a fundamental variable. While the sensitivity of inflation, exchange rate sensitivity and interest rate sensitivity included in macroeconomic variables. The population in this study are all porperti and real estate company listed on the Stock Exchange in 2014-2018. The sample selection using purposive sampling technique, acquired 23 companies in the sample with the five companies in the category of financial distress and 18 companies in the category of non financial distress. The analytical method used is logistic regression and sensitivity analysis. The results showed that the variable current ratio, debt to assets ratio, total asset turnover ratio, inflation sesnitivity, exchange rate sensitivity and interest rate sensitivity did not significantly affect the probability of financial distress. While return on equity significantly negative influence on the company’s financial distress.

PREDIKSI FINANCIAL DISTRESS : RASIO KEUANGAN DAN SENSITIVITAS MAKROEKONOMI PERUSAHAAN SEKTOR PRIMER

ABSTRACTThe objective of this research is to analyze the ability of macroeconomic proxied by the sensitivity of exchange rate and interest rate, and the ability of financial ratios proxied by current ratio (CR); return on assets (ROA); total asset turnover (TATO); debt to asset ratio (DAR); and sales growth (GROWTH), in predicting financial distress in primary sector companies in Indonesia. The population was 42 primary sector companies in Indonesia from the agricultural sector and mining sector listed on the Indonesia Stock Exchange. By employing a purposive sampling technique, the sample consisted of 39 companies, i.e., 9 agricultural companies and 30 mining companies in the 10 years range of the study from 2008 to 2018. Data were analyzed using logistic regression analysis. Results showed that ROA and DAR variables can be used to predict a company's financial distress. However, the exchange rate variable proxied by exchange rate sensitivity, interest rate variable proxied by interest rate sensitivity, CR, TATO, and GROWTH cannot be used to predict financial distress.Keywords: financial distress, financial ratio, and sensitivity of macroeconomc

COMPARISON OF THE PASS-THROUGH SPEED MODELS OF DIFFERENT MARKETS: AN EMPIRICAL STUDY OF THE MARKETS OF MAINLAND CHINA AND TAIWAN

This paper adopted the Boone Indicator, developed by Boone et al. (2008) and Van Leuvensteijn et al. (2011; 2013), to investigate the influence of different pass-through spread models in the competition among banks in emerging markets. With the market share of banks as a dependent variable and marginal cost as an independent variable, this paper probed into the competition among banks regarding the loan market to determine whether competition on the loan interest rates of banks affected the pass-through of monetary policy-related interest rates. After analyzing approximately 5,657 entries of records of the banking industries in Taiwan and mainland China, this paper reached three significant conclusions: 1) the Boone Indicator Model pointed out that, competition in the banking market of mainland China was more intense than that of Taiwan; 2) empirical research based on the Interest Rate Spread Model indicated that the spread of mainland China was lower than that of Taiwan; 3) the Passthrough Speed Model implied that, the interest rate sensitivity of the market of mainland China was higher than that of the Taiwan market. The above results indicate that the influence of monetary policy pass-through on the interest rate of the market in mainland China is faster than in Taiwan.

Performance Measurement in the Life Insurance Industry: An Asset-Liability Perspective

Established risk-adjusted investment performance measures such as the Sharpe, the Sortino or the Calmar Ratio have been developed with an exclusive focus on the mutual and hedge fund industries. Consequently, they are less suited for liability-driven investors such as life insurance companies, whose portfolio choice is materially affected by the substantial interest rate sensitivity of their long-term contractual obligations. In order to tackle this limitation, we introduce the Asset-Liability Sharpe Ratio, which is theoretically motivated, computable based on publicly-available data, incentive compatible, and relevant. Hence, it should be a valuable new tool for performance assessment in the life insurance industry.

Duration gap analysis revisited method in order to improve risk management: the case of Chinese commercial bank interest rate risks after interest rate liberalization

Modern theories attach much attention to interest rate-related problems. We discuss the impacts of the interest rate liberalization, in China, for ten commercial banks of three markedly different ownership types. The methodology is based on revisited interest rate sensitivity analysis, duration analysis and value-at-risk analysis. The situation is examined within both vertical (composition of operating income and interest rate sensitivity gap for the ten banks in the same year) and horizontal (one bank over a 7-year period) aspects. Thereafter, we discuss the present management of interest rate risks by such banks. We conclude with several suggestions on how such commercial banks risk management can be refocused and on how their cases can be used for comforting other banking cases.

The interest rate sensitivity of output and prices with different levels of financial inclusion

PurposeThe purpose of this paper is to evaluate the interest rate (IR) sensitivity of output and prices in developing economies with different levels of financial inclusion (FI) for the period 2007Q1–2017Q4.Design/methodology/approachBy using the PCA method to construct an FI index for each country, the author divides the sample into two groups (high and low FI levels). Then, with panel vector autoregressions on per group estimated to assess the strength of the impulse response of output and prices to IR shock.FindingsThe findings show that the impact of an IR shock on output and inflation is greater in economies with a higher degree of FI.Practical implicationsThe finding indicates the link between FI and the effectiveness of IRs as a monetary policy tool, thereby helping Central banks to have a clearer goal of FI to implement their monetary policy.Originality/valueThis study emphasizes the important role of FI in the economy. From there, an FI solution is integrated into the construction and calculation of its impact on monetary policy, improving the efficiency of monetary policy transmission, contributing to price stability and sustainable growth.

Research on the Abnormal Growth of Chinese Household Savings Under the Effect of “Negative Interest Rate”

At present, China has once again entered the era of negative interest rate, but China’s residents’ savings have shown a phenomenon of extraordinary growth. The coexistence of negative interest rate and high savings makes the effect of savings rate weaken the effect of monetary policy. This paper conducts an empirical quantitative analysis of the nominal interest rate, real interest rate and the growth rate of Chinese residents’ savings from 1978 to 2017, in order to and studies the influence and change relationship between the nominal interest rate and real interest rate on Chinese savings. The results show that the nominal interest rate and Chinese household savings change in the same direction, while the real interest rate changes in the opposite direction. In the long run, the sensitivity of both nominal and real interest rates to savings decreases and tends to be stable. It is concluded that savings are still the means of maintaining and increasing the value of the public residents when the inflation rate is relatively obvious. The author analyzes the reasons and disadvantages on this basis. Finally, it points out that we should stick to the general direction of interest rate liberalization reform, improve residents’ consumption ability, and deal with the negative interest rate effect with “Chinese characteristics” flexibly.

Alternative estimates of the well-known negative relationship between the US interest rate risk and the flow-through capability

This paper estimates US industries' ability to transmit inflation shocks to the prices of their products and services (flow-through capability, FTC) and the stock duration (interest rate sensitivity) at the sector level. Then, considering the significant differences in ability among industries, we analyze the relationship between FTC and interest rate sensitivity using two alternative methodologies (in both cases). Finally, we find a significant negative relationship between FTC and stock duration, as suggested by previous literature. Thus, industries with high FTC, such as S7 (Finance and Real Estate), S9 (Manufacturing), S11 (Transportation and Warehousing) and S12 (Utilities), may be less sensitive (than expected) to changes in nominal interest rates. In contrast, sectors such as S4 (Retail Trade), S8 (Information) and S10 (Professional and Administrative Services) (with high IRS) may be more sensitive (than expected) to changes in nominal interest rates, indicating a weak ability to transmit inflation shocks to the prices of their products and services.

Interest Rates and Credit Spread Dynamics

This paper uses cointegration to model the time-series of corporate and government bond rates. We show that corporate rates are cointegrated with government rates and the relation between credit spreads and Treasury rates depends on the time horizon. In the short-run, an increase in Treasury rates causes credit spreads to narrow. This effect is reversed over the long-run and higher rates cause spreads to widen. These results imply a dynamic process for credit spreads that is not captured in existing models for pricing corporate bonds or measuring their interest rate sensitivity.

SENSITIVITAS FAKTOR EKONOMI MAKRO DAN MIKRO DALAM MEMPREDIKSI VOLATILITAS HARGA SAHAM PERUSAHAAN SEKTOR INDUSTRI FOOD & BEVERAGES

The movement of macroeconomic factors can be used to predict the movement of the stock price, but different researchers are using different macroeconomic factors because there is still no consensus among them which macroeconomic factors that have an influence on stock prices. This study aimed to analyze and test the impact of macroeconomics factors which consisting of inflation, interest rates, exchange rate, and microeconomy factors, consisting of asset growth, growth earnings and sales growth to the volatility of stock prices on food and beverages companies listed in Indonesia Stock Exchange between 2011 and 2015 period. The study measure the sensitivity of inflation and interest rates and stock price volatility by regressing each variable with a share price which will produce the sensitivity value of each variable. A total of 66 samples are tested by using the classic assumption as the precondition for regression analysis techniques (multiple regressions). The results showed that inflation is partially affect the stock price volatility, Indonesia Interest Rate (SBI) is partially effect on stock price volatility, and exchange rate and microeconomics are partially no effect on stock price volatility.

Securitized banking and interest rate sensitivity

Gorton and Metrick (J Financ Econ 104:425–451, 2012) coin the term “securitized banking” to refer to the combination of asset securitization activity along with the use of collateral to raise funds in the repo market. To examine securitized banking activities, an augmented measure of Berger and Bouwman’s (Rev Financ Stud 22:3779–3837, 2009) bank liquidity creation is constructed and it is found to be incrementally associated with value implications. This paper explores whether monetary policy regimes have differential implications for its association with interest rate risk for a broad sample of US bank holding companies. The marginal effect of securitized banking on interest rate sensitivity is greater during the contractionary period from 2004Q2 through 2006Q2. However, a corresponding inverse effect during the expansionary period from 2007Q3 through 2008Q4 is not found to be significant. These results are attributed to an attenuation in asset quality due to lax lending standards from a feedback effect in the period preceding the crisis, while there was an overall flight-to-quality during the crisis.

Demographics and interest rates in Asia

Demographic developments have been regarded as one important cause of the long-term movement in global interest rates. This paper provides empirical evidence of the relationship between demographics and interest rates over a wide sample of advanced and emerging market economies. It also finds that capital account openness limits the direct sensitivity of a country's interest rates to its own demographics. The results suggest that future demographic developments will continue to apply downward pressure on the interest rates in Asia which foresees a rapid aging.

The Interest Rate Sensitivity of Investment

Abstract The interest rate sensitivity of investment has often played an important role in macroeconomic models. However, many vector autoregressive (VAR) models do not include investment to the list of variables. In this paper, we empirically investigate the size and the evolution of the interest rate sensitivity of investment for the United States and the four largest European economies in the last few decades. We use a VAR model with four variables at quarterly frequency: real investment, real gross domestic product (GDP), inflation, and a measure of the short-term interest rate. In our VAR, the structural interest rate shock is identified under the assumption that macroeconomic quantities and inflation react to interest rate innovations with a lag. We test the appropriateness of this specification by comparing our approach with the identification of shocks derived from the changes in volatility approach. For the countries under consideration, we determine a date during either the 1980s or the 1990s where the interest rate sensitivity of investment began to decrease and became less responsive to monetary policy. In addition, we find that the interest rate sensitivity of investment has been higher in the United States than in Europe, particularly in the first subperiod. Zusammenfassung Die Zinssensitivität der Investitionen spielt oft eine große Rolle in theoretischen makroökonomischen Modellen. In dieser Studie untersuchen wir empirisch die Höhe und die zeitliche Änderung der Zinssensitivität der Investitionen für die Vereinigten Staaten und die vier größten europäischen Volkswirtschaften. Wir verwenden ein VAR-Modell mit vier Variablen: reale Investitionen, reales Bruttoinlandsprodukt, Inflation und kurzfristige Zinsen. In unserem VAR identifizieren wir den strukturellen Schock unter der Annahme, dass die realen makroökonomischen Variablen verzögert auf einen Zinsschock reagieren. Wir testen die Angemessenheit dieser Spezifikation, indem wir unsere Vorgehensweise mit der Identifikation durch den “changes in volatility approach” vergleichen. Wir finden heraus, dass entweder in den 1980er oder frühen 1990er Jahren ein Strukturbruch stattgefunden und sich die Zinssensitivität der Investitionen verringert hat. Interessanterweise zeigen unsere Resultate zudem, dass die Zinssensitivität der Investitionen in den Vereinigten Staaten höher gewesen ist als in den untersuchten europäischen Ländern – insbesondere bis in die 1980er Jahre. JEL Classification: E22, E43, E52

Interest Rate Risk of Life Insurers: Evidence from Accounting Data

Life insurers are exposed to interest rate risk, and their liability side is typically more sensitive to interest rate changes than their asset side. This paper develops an accounting-based measure of interest rate sensitivity. My approach uses the coexistence of historical cost and market value accounting, which permits the observation of valuations for different discount rates. Using microdata, I show that German life insurers have a significant exposure to interest rate risk. However, there is a wide dispersion across the sector. I find that insurers' size, growth and solvency are negatively correlated with interest rate risk. The heterogeneity suggests that insurers would behave differently during times of stress, which has important implications for understanding the macroprudential risks to which the sector is exposed.

The Insurance Sector in Japan: An Overview and Environmental Analysis

Insurance is a sector which affects the public interest. The sustainable development of the insurance sector is directly related to the stability of the national financial system and has an impact on the political stability of the country. Although the bursting of Japanese economic bubble and insurance liberalization had a serious impact on the Japanese insurance sector in the 1990s, it is getting back to the right track in recent years. Under the loose monetary and low interest rate policies in Japan at present, what is the current competitive environment? And could the Japan’s insurance sector has a steady growth continually? This article based on Porter‘s Five Force Model and PEST Model to analyze the micro-environment and macro-environment of the Japan’s insurance sector and reveals its current situation and potential challenges. Findings portray the competition in Japanese insurance sector is assessed as moderate and mainly comes from industry rivalry. In both policy and economic level, the current situation has a negative impact on the Japanese insurance sector. Moreover, the interest rate sensitivity of non-life insurance is generally lower than that of life insurance. So the negative interest rate policy in Japan will seriously affect the development of the life insurance sector, while the non-life insurance sector has little influence.

Designing a Simple Loss Function for Central Banks: Does a Dual Mandate Make Sense?

AbstractYes, a dual mandate makes a lot of sense. This article studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilising economic activity also stabilises other welfare-relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilising inflation and resource utilisation, and also when imposing a moderate degree of interest rate volatility.

Switching interest rate sensitivity regimes of U.S. Corporates

We study interest rate sensitivities of U.S. investment grade BBB-rated and high yield corporate bonds over the period of 2001–2016. Our methodology assesses the capital gains of corporate bond portfolios and risk-free government bond portfolios, using average coupon and blended yield indices for the U.S. market. For both, U.S. BBB and high yield corporate bonds, we evidence the switching, from positive to negative interest rate sensitivity, occurring over the transition from the normal economic conditions to the periods of economic distress and vice-versa. The proposed theoretical explanation of such binary behavior posits an interrelation between interest rate and creditworthiness of issuers, which varies according to the phases of the business cycle. This research advances an economic understanding of interest rate risk management and sheds light on how financial institutions may develop strategies that hedge against downside risk.

Interest rate sensitivity of spanish companies. An extension of the Fama-French five-factor model

This paper studies the sensitivity of share prices of Spanish companies included in the IBEX-35 to changes in different explanatory variables, such as market returns, interest rates and factors proposed by Fama and French (1993, 2015) between 2000 and 2016. In addition, for robustness, this paper analyses whether the sensitivity of stock returns is different between two periods: precrisis and recent financial crisis. The results confirm that, in general, all the considered factors are relevant. Furthermore, “market return” and “size” factors show greater explanatory power, together with the “value” factor in the crisis period. Regarding the analysis at sector level, “Oil and Energy”, “Basic Materials, Industry and Construction” and “Financial and Real Estate Services” sectors appear to be highly sensitive to changes in the risk factors included in the asset pricing factor model.

Is government borrowing crowding out long term debt resources

PurposeThe purpose of this paper is to empirically investigate the possibility of financial crowding out in the long-term debt market in India taking the corporate bond market as a proxy.Design/methodology/approachThe study follows a two-pronged approach. First, it tests the corporate bond market sensitivity to interest rate, along with other determinants like commercial bank credit and government securities size using the autoregressive distributed lag approach. These are considered instrumental in the development of a long-term debt market. Second, it tests if the interest rate changes are fiscal deficit (FD) induced using Granger causality framework.FindingsIt finds evidence of both the interest rate sensitivity of the corporate bond market and the interest rates to be FD induced, thereby empirically validating the possibility of financial crowding out in the Indian debt market segment.Research limitations/implicationsBased on the results, it seems that any deviation from the path of fiscal prudence can prove dear in the development of the corporate bond market. Also, the banking sector is overexposed to the risks it is not geared to handle, given by the serious asset-liability mismatches and contraction it leads in the market debt, like the corporate bond market. The government securities market could be further developed, which would provide a cue to corporate segment further and also a benchmark yield curve.Originality/valueThe study adds to the very limited literature on the corporate bond market in India, especially in the empirical domain and possibly is the first attempt to empirically explore the aspect of financial crowding out with reference to corporate bond market.

Risk Management for Sovereign Financing within a Debt Sustainability Framework

The mix of instruments used to finance a sovereign is a key determinant of debt sustainability through its effect on funding costs and risks. We extend standard debt sustainability analysis to incorporate debt-financing decisions in the presence of macroeconomic, financial, and fiscal risks. We optimize the maturity of debt instruments to trade off borrowing costs with refinancing risk. Risk is quantified with a coherent measure of tail risk of financing needs, conditional Flow-at-Risk. A constraint on the pace of reduction of debt stocks is also imposed, and we model the effect of debt stocks on the yield curve through endogenous risk and term premia. On a simulated economy, we show that the cost-risk and flow-stock trade-offs embedded in issuance decisions are key determinants of the evolution of debt dynamics and are economically significant. Comparing three alternative optimizing strategies and some simple fixed-issuance rules, we also draw lessons on when and why optimizing matters the most. This depends on the risk tolerance level, the size, cost, and maturity of legacy debt, and the sensitivity of interest rates to debt. Our model quantifies thresholds for the minimum level of refinancing risks and the maximum pace of debt reduction that a sovereign could reach given its economic fundamentals. Going beyond those thresholds is only feasible through adjustments of gross financing needs, and an extension of the baseline model identifies the hot spots for these adjustments, computing their minimum size and optimal timing. Our findings inform policy decisions concerning both official sector borrowing and public finance, with a focus not only on minimizing interest payments but also on managing refinancing risks and increasing debt dynamics.