Open AccessStock And Bond Market Linkage In The Empirical Study Of Interest Rate Sensitivity Of Bank Returns
Author(s) -
Suresh C. Srivastava,
Shahid Hamid,
Askar H. Choudhury
Publication year - 2011
Publication title -
journal of applied business research
Language(s) - English
Resource type - Journals
eISSN - 2157-8834
pISSN - 0892-7626
DOI - 10.19030/jabr.v15i1.5689
Subject(s) - orthogonalization , bivariate analysis , econometrics , economics , interest rate , rendleman–bartter model , stock market , stock (firearms) , stock market index , linkage (software) , robustness (evolution) , financial economics , mathematics , statistics , volatility (finance) , monetary economics , mechanical engineering , paleontology , biochemistry , chemistry , algorithm , horse , gene , biology , engineering
The bank stocks equilibrium pricing relation is the traditional CAPM augmented by a second factor to account for the unexpected changes in the interest rates. This paper examines the methodological issue of constructing an interest rate variable that is orthogonal to the market index. We test a new approach in which the interest rate variable and the market return are treated as the components of a bivariate vector, a suitable vector ARMA model is determined, and then the appropriate whitened residuals are used as the interest rate factor in the two-factor model. Results are compared with the results from other models in which prevailing orthogonalization procedure is used. Our investigation indicates that the robustness of the result depends, to a limited extent, on the procedure employed to orthogonalize the two factors.