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An Investigation of the Impact of Interest Rates and Interest Rate Volatility on Australian Financial Sector Stock Return Distributions

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  • Robert W. Faff
  • Allan Hodgson
  • Michael L. Kremmer

Abstract

This paper extends the existing literature by analysing the dual impact of changes in the interest rate and interest rate volatility on the distribution of Australian financial sector stock returns. In addition, a multivariate GARCH‐M model is used to analyse the impact of deregulation on the financial institutions sector. It was found that there is a consistent inter‐temporal trade off between risk and return over the different regulatory periods. Moreover, finance corporations were found to be highly sensitive to new shocks across the financial sector and deregulation increased the risk faced by finance corporations and small banks – effectively increasing the required rate of return and explaining the continued rationalisation of these sectors. Furthermore, deregulation has changed the fundamental relationship between interest rates and large bank stock excess returns from positive in the pre‐deregulation period to negative in the post‐deregulation period. This reflects the changing institutional environment from one of controlled credit rationing to a more competitive environment.

Suggested Citation

  • Robert W. Faff & Allan Hodgson & Michael L. Kremmer, 2005. "An Investigation of the Impact of Interest Rates and Interest Rate Volatility on Australian Financial Sector Stock Return Distributions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5‐6), pages 1001-1031, June.
    • Handle: RePEc:bla:jbfnac:v:32:y:2005:i:5-6:p:1001-1031
    DOI: 10.1111/j.0306-686X.2005.00620.x
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    References listed on IDEAS

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    2. Gloria M. Soto Pacheco & Cristóbal González & Laura Ballester & Román Ferrer, 2009. "Determinants of interest rate exposure of Spanish banking industry," Working Papers. Serie EC 2009-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    3. Andrew Phiri, 2018. "Has the South African Reserve Bank responded to equity returns since the sub-prime crisis? An asymmetric convergence approach," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 10(3), pages 205-225.
    4. Wided Ben Moussa, 2014. "Bank Stock Volatility And Contagion: An Empirical Investigation With Application Of Multivariate Garch Models," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 39(2), pages 1-24, June.
    5. Akhtaruzzaman, Md & Shamsuddin, Abul & Easton, Steve, 2014. "Dynamic correlation analysis of spill-over effects of interest rate risk and return on Australian and US financial firms," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 378-396.
    6. Shu Ling Lin, 2008. "Conditional risk and return in Asian emerging markets: evidence from the banking sector," Applied Economics, Taylor & Francis Journals, vol. 40(24), pages 3173-3183.
    7. Ferrer, Román & Bolós, Vicente J. & Benítez, Rafael, 2016. "Interest rate changes and stock returns: A European multi-country study with wavelets," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 1-12.
    8. Fassil Fanta, 2012. "Macroeconomic uncertainty, excess liquidity and stability of money demand (M3) in Australia," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 5(4), pages 325-344.
    9. Li, Shaofang & Marinč, Matej, 2014. "The use of financial derivatives and risks of U.S. bank holding companies," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 46-71.
    10. Aloui Mouna & Jarboui Anis, 2017. "Stock Market, Interest Rate and Exchange Rate Risk Effects on non Financial Stock Returns During the Financial Crisis," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(3), pages 898-915, September.
    11. Brailsford, T.J. & Lin, Shu Ling & Penm, Jack H.W., 2006. "Conditional risk, return and contagion in the banking sector in asia," Research in International Business and Finance, Elsevier, vol. 20(3), pages 322-339, September.

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