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- Title
A RE-EXAMINATION OF INTEREST RATE SENSITIVITY IN THE COMMON STOCKS OF FINANCIAL INSTITUTIONS.
- Authors
Chance, Don M.; Lane, William R.
- Abstract
This article focuses on the re-examination of interest rate sensitivity in the common stocks of financial institutions. Although no definitive theoretical or empirical link has been developed, a more fundamental issue is to examine those conditions under which specific groups of securities exhibit a persistent tendency to covary with interest rates. Such covariance is observed if the asset-liability structures of some firms transmit interest rate movements to the market as signals that economic earnings prospects have changed. The market interprets these signals and establishes a new set of equilibrium prices. Covariance with interest rates could also occur if other characteristics such as high dividend yields make certain common stocks acceptable substitutes for fixed income securities. The increase in academic research on the common stocks of banks and other financial institutions underscores a need to derive an appropriate return generating model for these securities. A more practical concern, however, is that the presumption of a relationship may prompt investors with expectations of significant interest rate movements to alter their holdings of these securities. This strategy, which appears to have no rational theoretical basis and only limited empirical support, may result in needless transaction costs and inefficient portfolios due to biased expectations.
- Publication
Journal of Financial Research, 1980, Vol 3, Issue 1, p49
- ISSN
0270-2592
- Publication type
Academic Journal
- DOI
10.1111/j.1475-6803.1980.tb00036.x