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.
Karachi Stock Exchange, Stock returns, Interest
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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
March 02, 2021