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Interest rate risk and bank equity valuations

Author

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  • English, William B.
  • Van den Heuvel, Skander J.
  • Zakrajšek, Egon

Abstract

Using high-frequency identification, we estimate the reaction of bank stock prices to movements in interest rates prompted by FOMC announcements and examine how this reaction varies with key bank characteristics. Bank stock prices decline significantly following unanticipated increases in the level or slope of the yield curve. The reaction is larger for banks that rely heavily on core deposits but is reduced for banks with a large maturity mismatch, consistent with banks’ role in maturity transformation. Policy-induced interest rate changes appear to affect accounting profits primarily through net interest margins and changes in the composition of bank balance sheets.

Suggested Citation

  • English, William B. & Van den Heuvel, Skander J. & Zakrajšek, Egon, 2018. "Interest rate risk and bank equity valuations," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 80-97.
  • Handle: RePEc:eee:moneco:v:98:y:2018:i:c:p:80-97
    DOI: 10.1016/j.jmoneco.2018.04.010
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    More about this item

    Keywords

    Monetary policy; FOMC announcements; Interest rate surprises; Maturity transformation; Bank profitability; Deposit disintermediation;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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