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Conditional interest rate risk and the cross‐section of excess stock returns
Author(s) -
Atanasov Victoria
Publication year - 2016
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2016.02.003
Subject(s) - economics , downside risk , risk free interest rate , interest rate , capital asset pricing model , stock (firearms) , interest rate risk , explanatory power , risk premium , rendleman–bartter model , econometrics , financial economics , real interest rate , monetary economics , portfolio , mechanical engineering , philosophy , epistemology , engineering
Differences in excess stock returns can be rationalized by their sensitivities to conditional interest rate risk. Value stocks are particularly sensitive to upside movements in interest rate growth, while growth stocks react strongly to downside movements in interest rate growth. Consistent with the basic asset pricing theory, the upside interest rate risk commands a negative premium which is higher than the premium associated with the downside interest rate risk. Upside beta pertains its explanatory power after controlling for exposure to regular unconditional interest rate and various sources of financial and conditional macroeconomic risk.