Interest rate sensitivity and stock returns

Authors

Mohsin R. Khan, Bahria University, Islamabad, Pakistan
Zahid Mahmood, Bahria University, Islamabad, Pakistan

Abstract

This paper investigates the sensitivity of interest rate to stock return of financial institutions traded at Karachi Stock Exchange. Two Index Model of Stone and Bernell(1974) have been used to test the proposition of the present study. Three different portfolios of financial institutions have been examined against sensitivity of actual and unanticipated interest rates. Repo rate/Policy rate instead of t-bill rate is used for the proxy of interest rate. The data is collected from twenty nine financial institutions covering the time period from 2004 to 2011. Unit root test, co integration and error correction mechanism have been checked before proceeding to Two Index Model. For unanticipated interest rate risk ARIMA is proposed using Box Jenkins methodology. The findings of present study shows that stock returns of financial institution demonstrates positive sensitivity to market index and are statistically significant. However, sensitivity to interest rate is negative and statistically insignificant.

Keywords

Karachi Stock Exchange, Stock returns, Interest

DOI

https://doi.org/10.54784/1990-6587.1214

Journal of Economic Literature Subject Codes

E44

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Recommended Citation

Khan, M., & Mahmood, Z. (2013). Interest rate sensitivity and stock returns. Business Review, 8(1), 20-33. Retrieved from https://doi.org/10.54784/1990-6587.1214