Thrift Stock Returns and Balance Sheet Interest Rate Sensitivity
Year: 1994
Type: preprint
Abstract: The measurement of balance sheet interest rate sensitivity has become an important issue for depository institutions and their supervisory agencies, both in terms of accurately measuring net worth and in measuring interest rate risk. In this study, balance sheet (and reported off-balance sheet) positions that reflect prevailing market interest rates at a monthly frequency are constructed for a sample of thrifts with traded stock between 1984 and 1992. Changes in mark- to-market balance sheet values reflecting changes in market interest rates are then tested for their ability to explain the thrifts' stock returns using multivariate time series and cross-section regression analysis. While concerned with the realized changes in mark-to-market positions, the tests have implications for ex ante interest rate risk measurement as well. Analytic background also is provided for the measurement of interest rate sensitivity and its relation to the firms' equity returns in the presence of deposit insurance. Results of the tests using the mark-to-market measure of interest rate sensitivity are compared with those using simply a bond return and to simple maturity-base measures of thrift interest rate exposures. Among three indicators of risk (market, interest rate, and industry- specific), the interest rate measures generally are the weakest in explaining thrift stock returns. Depending on the test, however, a simple long-term bond return is found to have significant explanatory power. Neither the mark-to- market nor the simple maturity-based measures of interest rate sensitivity are able to dominate or even add to the bond return's explanatory power. Nor is there any indication that the explanatory power of the balance sheet interest rate sensitivity measure increases with the sophistication of the measure. These results are interpreted and possible weaknesses in the power of the tests are considered.
Source: SSRN Electronic Journal
Authors: Stephen A. Lumpkin, James M. O’Brien
Institution: Federal Reserve Board of Governors
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1502799149