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Interest Rate Risk of European Financial Corporations

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  • Peter Oertmann*
  • Christel Rendu
  • Heinz Zimmermann

Abstract

We investigate the interest rate exposure of large European financial corporations’ equity returns. For the period from January 1982 to March 1995 we estimate multifactor index models to examine the sensitivity of equity returns to market index returns and domestic as well as global interest rate movements. In addition, we specify an APT‐model to test whether an exposure to interest rate movements is rewarded in the cross‐section of expected returns. In the four European markets both domestic and global interest rate shifts constitute driving forces of stock returns beyond the influence of the domestic market indices. However, the exposure to interest rate movements does not seem to be rewarded in the same fashion among the markets.

Suggested Citation

  • Peter Oertmann* & Christel Rendu & Heinz Zimmermann, 2000. "Interest Rate Risk of European Financial Corporations," European Financial Management, European Financial Management Association, vol. 6(4), pages 459-478, December.
  • Handle: RePEc:bla:eufman:v:6:y:2000:i:4:p:459-478
    DOI: 10.1111/1468-036X.00135
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    File URL: https://doi.org/10.1111/1468-036X.00135
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    Citations

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    Cited by:

    1. Mojisola Olugbode & Ahmed El-Masry & John Pointon, 2014. "Exchange Rate and Interest Rate Exposure of UK Industries Using First-order Autoregressive Exponential GARCH-in-mean (EGARCH-M) Approach," Manchester School, University of Manchester, vol. 82(4), pages 409-464, July.
    2. Terence Tai-Leung Chong & Shiyu Lin, 2017. "Predictive models for disaggregate stock market volatility," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(3), pages 261-288, August.
    3. Bartram, Söhnke M., 2008. "What lies beneath: Foreign exchange rate exposure, hedging and cash flows," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1508-1521, August.
    4. Korkeamäki, Timo, 2011. "Interest rate sensitivity of the European stock markets before and after the euro introduction," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 811-831.
    5. Francisco Jareno, 2008. "Spanish stock market sensitivity to real interest and inflation rates: an extension of the Stone two-factor model with factors of the Fama and French three-factor model," Applied Economics, Taylor & Francis Journals, vol. 40(24), pages 3159-3171.
    6. Jareño, Francisco & Navarro, Eliseo, 2010. "Stock interest rate risk and inflation shocks," European Journal of Operational Research, Elsevier, vol. 201(2), pages 337-348, March.
    7. Bessler, Wolfgang & Kurmann, Philipp, 2014. "Bank risk factors and changing risk exposures: Capital market evidence before and during the financial crisis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 151-166.
    8. Zaghum Umar & Syed Jawad Hussain Shahzad & Román Ferrer & Francisco Jareño, 2018. "Does Shariah compliance make interest rate sensitivity of Islamic equities lower? An industry level analysis under different market states," Applied Economics, Taylor & Francis Journals, vol. 50(42), pages 4500-4521, September.
    9. 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.
    10. Söhnke Bartram, 2002. "The Interest Rate Exposure of Nonfinancial Corporations," Review of Finance, European Finance Association, vol. 6(1), pages 101-125.
    11. Marc-Gregor Czaja & Hendrik Scholz & Marco Wilkens, 2009. "Interest rate risk of German financial institutions: the impact of level, slope, and curvature of the term structure," Review of Quantitative Finance and Accounting, Springer, vol. 33(1), pages 1-26, July.
    12. Oliver Entrop & Marco Wilkens & Alexander Zeisler, 2009. "Quantifying the Interest Rate Risk of Banks: Assumptions Do Matter," European Financial Management, European Financial Management Association, vol. 15(5), pages 1001-1018, November.
    13. Marc†Gregor Czaja & Hendrik Scholz & Marco Wilkens, 2010. "Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany," European Financial Management, European Financial Management Association, vol. 16(1), pages 124-154, January.
    14. María de la O & Francisco JAREÑO, Francisco & SKINNER, Frank S., 2017. "The Financial Crisis Impact: An Industry Level Analysis Of The Us Stock Market González," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 17(2), pages 61-74.
    15. 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.
    16. Drobetz, Wolfgang & Erdmann, Thomas & Zimmermann, Heinz, 2007. "Predictability in the cross-section of European bank stock returns," Working papers 2007/21, Faculty of Business and Economics - University of Basel.
    17. Román Ferrer & Cristóbal González & Gloria M. Soto, 2010. "Linear and nonlinear interest rate exposure in Spain," Managerial Finance, Emerald Group Publishing, vol. 36(5), pages 431-451, April.

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