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A Two-Factor ARCH Model for Deposit-Institution Stock Returns

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Author Info
Song, Frank M
Abstract

This paper specifies a two-factor model for a sample of deposit institutions. The factors are the market return and an interest rate factor. The two-factor model is specified with Autoregressive Conditional Heteroskedacity (ARCH) modeling strategy and is estimated by Generalized Method of Moments (GMM). The market and interest rate risks are measured by their time-varying betas. The results suggest that the market risks have been volatile over the sample period 1977-87 and they increased and became more volatile after 1982. The interest rate risks were more stable and they did not respond to the Fed's regime change in monetary policy in 1979 and 1982. Specification tests suggest the usefulness of my two-factor ARCH model in the study of deposit-institution stock returns. Copyright 1994 by Ohio State University Press.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 26 (1994)
Issue (Month): 2 (May)
Pages: 323-40
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Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:2:p:323-40

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  1. Klaus P. Fischer & Jean-Pierre Gueyie & Edgar Ortiz, 1997. "Financial Liberalization: Commercial Bank's Blessing or Curse?," Finance 9705003, EconWPA. [Downloadable!]
  2. Susan Ryan & Andrew C. Worthington, 2002. "Time-Varying Market, Interest Rate and Exchange Rate Risk in Australian Bank Portfolio Stock Returns: A Garch-M Approach," School of Economics and Finance Discussion Papers and Working Papers Series 112, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
  3. Beverly J. Hirtle, 1996. "Derivatives, Portfolio Composition and Bank Holding Company Interest Rate Risk Exposure," Center for Financial Institutions Working Papers 96-43, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  4. Priti Verma & Dave Jackson, 2008. "Interest rate and bank stock returns asymmetry: Evidence from U.S. banks," Journal of Economics and Finance, Springer, vol. 32(2), pages 105-118, April. [Downloadable!] (restricted)
  5. Sohnke M. Bartram, 2001. "The Interest Rate Exposure of Nonfinancial Corporations," Finance 0112002, EconWPA, revised 27 Dec 2001. [Downloadable!]
  6. Simon H. Kwan, 2001. "Impact of deposit rate deregulation in Hong Kong on the market value of commercial banks," Working Papers in Applied Economic Theory 2001-11, Federal Reserve Bank of San Francisco. [Downloadable!]
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