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Interest rate changes and common stock returns of financial institutions: evidence from the UK

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  • E. Dinenis
  • S. K. Staikouras

Abstract

The objective of this paper is to examine the impact of interest rate changes on the common stock returns of portfolios of financial institutions in the UK. The five groups of financial institutions examined are banks, insurance companies, investment trusts, property investment companies and finance firms. In addition, a wide sample of nonfinancial firms is considered for comparison purposes. A two-index model is employed to test the effect of both current and unanticipated interest rate changes. An element of volatility in market yields is also introduced in a three-index model to measure the effect of variability in interest rates on the returns of these financial intermediaries. Two main implications emerge from the present paper for both financial and nonfinancial firms. First, a significant negative relationship seems to exist between the common stock returns and the changes in interest rates. Second, common stock returns and variability of interest rates are related with a significant positive coefficient.

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  • E. Dinenis & S. K. Staikouras, 1998. "Interest rate changes and common stock returns of financial institutions: evidence from the UK," The European Journal of Finance, Taylor & Francis Journals, vol. 4(2), pages 113-127.
    • Handle: RePEc:taf:eurjfi:v:4:y:1998:i:2:p:113-127
    DOI: 10.1080/135184798337344
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    9. Fatema Alaali, 2017. "Analysing the Effect of Oil Price Shocks on Asset Prices: Evidence from UK Firms," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 418-432.
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    11. Ahmed A. El-Masry, 2004. "The Exchange Rate Exposure of UK Nonfinancial Companies: Industry-Level Analysis," International Finance 0401001, University Library of Munich, Germany.
    12. Alaali, Fatema, 2017. "Analysing the Effect of Oil Price Shocks on Asset Prices: evidence from UK firms," MPRA Paper 78013, University Library of Munich, Germany.
    13. Zaremba, Adam & Cakici, Nusret & Bianchi, Robert J. & Long, Huaigang, 2023. "Interest rate changes and the cross-section of global equity returns," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
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    19. 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.
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    21. Alexey Akimov & Simon Stevenson & Maxim Zagonov, 2015. "Public Real Estate and the Term Structure of Interest Rates: A Cross-Country Study," The Journal of Real Estate Finance and Economics, Springer, vol. 51(4), pages 503-540, November.

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