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Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany
Author(s) -
Czaja MarcGregor,
Scholz Hendrik,
Wilkens Marco
Publication year - 2010
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2008.00455.x
Subject(s) - interest rate , interest rate risk , stock (firearms) , economics , risk free interest rate , financial economics , equity (law) , rate of return , portfolio , business , monetary economics , finance , mechanical engineering , political science , law , engineering
The interest rate sensitivity of stock returns of financial and non‐financial corporations is a well‐known phenomenon. However, only little is known about the part of total stock returns that is attributable to the compensation an investor receives for being exposed to interest rate risk when investing in equity securities. We pursue here a benchmark portfolio approach, constructing benchmark portfolios having the same interest rate risk exposure as a particular stock. By studying the time series of returns of these asset‐specific benchmarks, we find: i) Regardless of the industry considered, the interest rate risk benchmarks of German corporations have mostly earned a significantly positive reward. ii) Returns of interest rate risk benchmarks of financial institutions exceeded significantly those of non‐financial corporations. iii) An investor willing to bear nothing but the average interest rate risk of German financial institutions would have earned a mean return of about or even exceeding 70% of the corresponding total stock returns. iv) Returns of the interest rate risk benchmarks of the German insurance sector were significantly higher than those of German banks, which seems to contradict conventional market wisdom that insurances hedge interest rate risks.