Stock Returns Of Financial Institutions Research Articles

Downside Risk Analysis of Returns Financial Institutions of Pakistan

This study empirically tested the standard CAPM and DR-CAPM to examine the cross-sectional variation in stock returns of financial institutions listed at PSE over the period 2002-2016. The analysis is also performed for three sub-periods: pre-financial crisis period (2002-2005), during- financial crisis period (2006-2009), and post-financial crisis period (2010-2016). The empirical analysis is carried out following the two-pass regression analysis of Fama & Macbeth (1973). The results of the study suggest that the standard CAPM is not suitable for calculating the risk and required rate of returns for Pakistani financial institutions. To examine the validity of DR- CAPM, we estimate the downside beta developed by Bawa and Linderberg (1977), Fishburn (1977), Harlow and Row (1989), and Estrada (2002). Out of these models, the DR-CAPM of Fishburn (1977) appeared to be more appropriate for calculating required rate of returns. The DR-CAPM of Harlow and Row (1989) also provides evidence of a positive and statistically significant risk-return relationship in most of the examined sub-periods. However, the results for Estrada (2002) are inconclusive at best, suggesting that the downside beta of Estrada (2002) is an inefficient measure of risk. The results help investors in identifying an appropriate and suitable measure of risk for financial institutions of Pakistan, which, in turn, enables the investors to design an efficient and well-diversified portfolio. The results are also of great significance to managers of financial institutions as they help them in making capital budgeting decisions and calculating the cost of equities.

MONETARY SHOCKS, POLICY TOOLS AND FINANCIAL FIRM STOCK RETURNS: EVIDENCE FROM THE 2008 US QUANTITATIVE EASING

We extend the work of Bernanke and Kuttner [(2005). What explains the stock market’s reaction to federal reserve policy? Journal of Finance, 60, 1221–1257] by examining the impact of monetary shocks and policy tools on aggregate stock returns as well as the stock returns of financial institutions during the recent period of quantitative easing (QE) in the US. Specially, we test for the effectiveness of a major non-conventional monetary policy tool, the use of special asset purchase programs by the Federal Reserve, in impacting the financial markets. Estimates from vector auto-regression (VAR) analyses show that the impact of both unexpected and expected monetary shocks on aggregate stock returns is magnified several times during periods of QE. In addition, traditional monetary policy tools, like the Federal Funds rate, have no impact on aggregate stock returns, neither leading up to, nor during QE, while our non-conventional policy measure does appear to have some impact. In an extension of our results, we find that unexpected monetary shocks have an increased marginal impact on the stock returns of financial firms during QE. In addition, the stock returns of financial institutions have significant reactions to both changes in non-conventional monetary policy tools and announcements surrounding non-conventional policy actions.

The Interest Rate Risk Exposure of Financial Intermediaries: A Review of the Theory and Empirical Evidence

The paper surveys current and previous research on financial institutions’ interest rate risk exposure. The implications of such exposure are discussed and motivating insights are emphasized. Various theoretical frameworks and models are presented. For each one an overview of the studies and any relationship to each other is provided. In a cross‐industry analysis, other idiosyncratic risk factors are considered and their importance is delineated. A number of empirical relations are established. More specifically, there is an inverse relationship between interest rate changes and common stock returns of financial institutions. The intermediaries’ apparent yield sensitivity is mainly attributed to the duration gap inherent in their balance sheet structure. Furthermore, the aforesaid equity sensitivity due to other possible dynamics such as dividend yield, unanticipated inflation and regulatory lags is also considered. Changes in economic regimes have altered volatility in market yields with a subsequent effect, positive or negative, on financial intermediaries’ equity returns. The issue of the risk‐return compensation is further analyzed, and findings suggest that the interest rate risk is priced by capital markets. Finally, a few other issues are identified as avenues for future research.

Interest rate changes and common stock returns of financial institutions: evidence from the UK

The objective of this paper is to examine the impact of interest rate changes on the common stock returns of portfolios of financial institutions in the UK. The five groups of financial institutions examined are banks, insurance companies, investment trusts, property investment companies and finance firms. In addition, a wide sample of nonfinancial firms is considered for comparison purposes. A two-index model is employed to test the effect of both current and unanticipated interest rate changes. An element of volatility in market yields is also introduced in a three-index model to measure the effect of variability in interest rates on the returns of these financial intermediaries. Two main implications emerge from the present paper for both financial and nonfinancial firms. First, a significant negative relationship seems to exist between the common stock returns and the changes in interest rates. Second, common stock returns and variability of interest rates are related with a significant positive coefficient.

Interest Rate Sensitivity, Asymmetry, and the Stock Returns of Financial Institutions

AbstractThis paper attempts to reconcile the conflicting results reported in prior interest rate sensitivity studies that utilized the stock returns of financial institutions. By analyzing the interest rate elasticities during different interest rate cycles and adjusting for different monetary policy regimes, this paper suggests that sample period effects rather than methodological differences account for the conflicts presented in previous studies. More specifically, the empirical results indicate some asymmetrical interest rate sensitivities during various interest rate cycles. For example, the stock returns of savings and loan institutions were found to be more sensitive to falling interest rates. On the other hand, the stock returns of banks appeared to be more responsive to rising interest rates. Consequently, any attempt to employ models utilizing aggregated data either for policy making or to construct portfolio strategies will result in time aggregation bias and misguided decision making.

Access to deposit insurance, insolvency rules and the stock returns of financial institutions

This paper analyzes how access to deposit insurance affects the common stock returns of financial institutions during periods of financial distress. During periods of distress the definition of insolvency used by insuring agencies may be modified to avoid a substantial number of bank failures. These modifications can increase the value of future deposit guarantees and affect the behavior of stock returns of banks and S&Ls. This hypothesis is examined using S&L data for the 1976 through 1983 period. Modification of insolvency rules applied to S&Ls appears to have reduced significantly the co-movement of S&L stock returns with S&L portfolio holdings.

The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions

ABSTRACTThis paper examines the relation between the interest rate sensitivity of common stock returns and the maturity composition of the firm's nominal contracts. Using a sample of actively traded commerical banks and stock savings and loan associations, common stock returns are found to be correlated with interest rate changes. The co‐movement of stock returns and interest rate changes is positively related to the size of the maturity difference between the firm's nominal assets and liabilities.

The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions

This paper examines the relation between the interest rate sensitivity of common stock returns and the maturity composition of the firm's nominal contracts. Using a sample of actively traded commerical banks and stock savings and loan associations, common stock returns are found to be correlated with interest rate changes. The co-movement of stock returns and interest rate changes is positively related to the size of the maturity difference between the firm's nominal assets and liabilities.