Elyas Elyasiani

The Sensitivity of Bank Stock Returns to Market, Interest and Exchange Rate Risks

This paper presents and estimates a multifactor model of bank stock returns that incorporates market return, interest rate and exchange rate risk factors. A model of the optimizing behavior of an international banking tirm is used to derive the sensitivity coefficients of the alternative factors. Regression equations are estimated that are based on either actual or unexpected values of the underlying factors with a post-October 1979 time dummy variable and with a moneycenter bank dummy variable. Standard results are obtained for the market and interest rate variables while new results are derived for the exchange rate variable. The specific effects of the latter variable are found to be dependent on the time period of observation and the moneycenter status of banks. The interest rate variable is important for the valuation of common stocks of financial institutions because the returns and costs of financial institutions are directly dependent on interest rates. Various authors have, therefore, examined the empirical sensitivity of stock returns of financial institutions to changes in market interest rates. ’ On the international side, the advent of the flexible exchange rate system in the 1970s and the growing internationalization of the economy, induding the banking sector, has introduced another macro financial variable, the exchange rate, as a potential determinant of bank stock returns. However, no empirical study has yet been published that explicitly examines the joint interaction of exchange rates and interest rates on bank stock pricing.

Sensitivity of the Bank Stock Returns Distribution to Changes in the Level and Volatility of Interest Rate: A GARCH-M Model

The objective of this paper is to employ the generalized autoregressive conditionally heteroskedastic in the mean (GARCH-M) methodology to investigate the effect of interest rate and its volatility on the bank stock return generation process. This framework discards the restrictive assumptions of linearity, independence, and constant conditional variance in modeling bank stock returns. The model presented here allows for shifts in the volatility equation in response to the changes in monetary policy regime in 1979 and 1982 to be estimated. ARCH, GARCH, and volatility feed back effects are found to be significant. Interest rate and interest rate volatility are found to directly impact the first and the second moments of the bank stock returns distribution, respectively. The latter also affects the risk premia indirectly. The degree of persistence in shocks is substantial for all the three bank portfolios and sensitive to the nature of the bank portfolio and the prevailing monetary policy regime.

A Nonparametric Approach to Measurement of Efficiency and Technological Change: The Case of Large U.S. Commercial Banks

The purpose of this paper is to derive the efficiency measures and the rate of technological change for a sample of large U.S. commercial banks by employing a nonparametric technique. This technique is used to construct a multiproduct production frontier relative to which the efficiency measures of the banks in the sample are calculated and the displacement of which over time provides a measure of the rate of technological change. The empirical results indicate that the relevant frontier shifted inward between 1980 and 1985 reflecting a high pace of technological advancement achieved by the banks in the sample. The pace varied significantly across the banks with some banks even regressing over time.

Productive Efficiency Performance of Minority and Nonminority-Owned Banks: A Nonparametric Approach

This study examines the efficiency performance of the minority-owned banks (MOBS) as multiproduct firms relative to that of the nonminority banks (NMOBs) using a highly flexible nonparametric approach. Since MOBS and NMOBs employ distinct technologies the efficiency indices for the two groups are derived relative to their respective group-specific frontiers and are contrasted to shed light on the ownership-efficiency relationship. The MOB sample is then disaggregated and the intra-group efficiency differentials are investigated. The findings support the hypothesis that abstracting the regional, regulatory, size, and maturity characteristics of banks, efficiency differentials between MOBS and NIMOBs are statistically insignificant.

Interdependence and Dynamic Linkages between Stock Markets of Sri Lanka and Its Trading Partners

This paper investigates the interdependence and dynamic linkages between the emerging capital market of Sri Lanka and the markets of its major trading partners (Taiwan, Singapore, Japan, South Korea, Hong Kong, India, and the US) using the vector autoregression (VAR) technique. No significant interdependence is discovered between the Sri Lankan market and the equity markets of the US and the Asian markets considered. Small capitalization, lack of liquidity, high concentration in blue chips, and unilateral investment barriers on Sri Lankan investors are possible reasons for lack of interdependence.

Interest Rate Risk and Equity Values of Life Insurance Companies: A GARCH-M Model

The importance of managerial decisions related to interest-sensitive cash flows has received considerable attention in the insurance literature. Consistent with the interest-sensitive nature of insurer assets and liabilities, empirical research has shown that insurer insolvency is significantly related to interest rate volatility. We investigate the interest rate sensitivity of monthly stock returns of life insurers based on a generalized autoregressive conditionally heteroskedastic in the mean (GARCH-M) model. We examine three different portfolios (equally weighted, risk-based, and size-based) with binary variables to explicitly account for varying interest rate strategies adopted by the Federal Reserve System. Results based on data for the period 1975 through 2000 indicate that life insurer equity values are sensitive to long-term interest rates and that interest sensitivity varies across subperiods and across risk-based and size-based portfolios. The results complement insolvency research that links insurer financial performance to changes in interest rates.

Institutional Ownership Stability and Risk Taking: Evidence from the Life-Health Insurance Industry

We investigate the relationship between risk taking of life-health (LH) insurers and health (LH) insurers and stability of their institutional ownership within a simultaneous equation system model. Several results stability of their institutional ownership within a simultaneous equation system model. Several results are obtained. First, stable institutional ownership is associated with lower total risk of LH insurers, supporting the prutudent-man law hypothesis. Second, when investors are sorted in terms of stringency of the prudent-man restrictions, their negative effect on risk holds for all, except insurance companies, as owners of LH insurers. Third, large institutional owners do not raise the riskiness of the investee-firms, as proposed by the large shareholder hypothesis. Fourth, institutional owners reduce riskiness of the investees through reduction their leverage and underwriting risks, though they increase their investment risk, in which they have greater expertise. These findings have important regulatory, managerial and investment implications.

International Spillover of Risk and Return Among Major Banking Institutions: A Bivariate GARCH Model

Using the bivariate GARCH methodology, this study examines bank stock sensitivities to market, interest rate, and exchange rate, and investigates the spillover effects of interest rate volatility and unsystematic risk among the banking sectors of the United States and Japan, and the United States and Germany. Empirical results show that return-generating processes of the banking sectors considered can be properly described by GARCH models. Within this framework, banks are found to be highly sensitive to macroeconomic shocks such as the exchange rate and interest rate, with the latter exerting its impact at the volatility level. Moreover, stock volatilities in the banking sectors of the three countries are found to be highly interdependent. The direction and magnitude of the effects from interest rate volatility and unsystematic shocks in one country on other countries are sensitive to the origin of the shock, with the United States playing a leadership role. The findings have serious implications on international financial stability, international portfolio diversification, and policy formulation by central banks and fiscal authorities.

An empirical test of association between production and financial performance: the case of the commercial banking industry

Banks choose the asset and liability mix of their portfolio in order to achieve maximum efficiency and optimal financial position. The purpose of this paper is to investigate the relationship between a banks financial performance, measured by accounting-based ratios, and production performance proxied by efficiency indexes. While the existing literature examines financial ratios and efficiency issues in isolation, it is shown that a significant association between financial and production performances does exist for large commercial banks and that this association is time-sensitive. This finding suggests that efficiency indexes should be considered as a supplement to financial ratios in on-site examination in order to monitor the performance of banking firms more effectively.

The performance of foreign owned, minority owned, and holding company owned banks in the U.S

The regulatory and legal environment shaping the constantly evolving US bank structure is pervasive, making it necessary for regulators to simultaneously consider interrelated aspects of that structure. This paper investigates the simultaneous effects of foreign, minority and holding company ownership upon bank performance with both aggregated and disaggregated models. The aggregated results suggest that foreign owned bank performance is similar to non-attribute banks, but that the performance of minority and holding company owned banks provides some cause for concern. The disaggregated results provide additional insights particularly with respect of US banks owned by foreign banks and black owned banks. Policy implications are discussed.