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The relationship between exchange rates, interest rates and Australian bank returns

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  • Ameeta Jain
  • Paresh Kumar Narayan
  • Dianne Thomson

Abstract

Although there has been significant research on US financial intermediaries' stock returns and sensitivity to interest yields, there has only been limited research on Australian bank stock returns and key macro variables, such as interest rates and exchange rates. The aim of this article is to examine this relationship for four major Australian banks, namely the Australia New Zealand bank (ANZ), the Commonwealth Bank of Australia (CBA), the National Australia Bank (NAB) and the Westpac Banking Corporation (WBC). We use the EGARCH model and examine the relationship using monthly data covering the period 1992 to 2007. The results suggest that for all four banks: (1) there is a similar and statistically significant negative relationship between interest rates and stock returns; and (2) there is evidence of an increase in returns during the period of appreciation of the Australian dollar.

Suggested Citation

  • Ameeta Jain & Paresh Kumar Narayan & Dianne Thomson, 2011. "The relationship between exchange rates, interest rates and Australian bank returns," Applied Economics Letters, Taylor & Francis Journals, vol. 18(10), pages 967-972.
  • Handle: RePEc:taf:apeclt:v:18:y:2011:i:10:p:967-972 DOI: 10.1080/13504851.2010.520661
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    1. Tam Cho, Wendy K. & Gaines, Brian J., 2007. "Breaking the (Benford) Law: Statistical Fraud Detection in Campaign Finance," The American Statistician, American Statistical Association, vol. 61, pages 218-223, August.
    2. David Giles, 2007. "Benford's law and naturally occurring prices in certain ebaY auctions," Applied Economics Letters, Taylor & Francis Journals, vol. 14(3), pages 157-161.
    3. George Judge & Laura Schechter, 2009. "Detecting Problems in Survey Data Using Benford’s Law," Journal of Human Resources, University of Wisconsin Press, vol. 44(1).
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