This study investigates the issue of whether financial intermediaries’ common stock returns incorporate a risk premium for their inherent exposure to unexpected changes in interest rates. A wide range of financial institutions is employed to test the hypothesis that the interest rate risk is priced by capital markets. In addition, the above sample is extended by incorporating firms from the non-financial sector. A two-factor model with the market portfolio and the changes in market yields, as exogenously specified risk variables, is employed. The model is estimated via a seemingly unrelated regression estimation (SURE) framework with both cross-equation restrictions and within equation nonlinear constraints on the parameters. The findings indicate that financial institutions’ equity returns incorporate a risk premium for their exposure to market yields’ surprises. The return generating function of the insurance business could be further explained by an additional factor such as currency movements. It is also empirically supported that the market premium drops out from the estimation process. When commercial and industrial firms are included in the estimation process, the findings unveil a reduction in the magnitude of the interest rate risk premium.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 15 (2005) Issue (Month): 7 (April) Pages: 499-508 Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF
For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).
Related research
Keywords:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: