“Relationship between Interest Rate Changes and Banking Stock Returns in Up-Market and Down-Market Situation”

Renu Ghosh

Abstract


Banking stocks are assumed to have interest rate sensitivity because banking profitability is a function of prevailing interest rate. This paper investigates the effects of interest rate changes on banking stock returns in India during up-market (when market returns are positive) and down-market (when market returns are negative) in order to know whether the relationship between interest rate changes and banking stock returns is uniform or changing according to change in market condition using OLS (ordinary least square) and correlation analysis. We found weak relationship between Bank stock returns and interest rate changes in India. Banking stock returns are having significant positive relationship with market returns. We also found that the relationship between banking stock returns and interest rate changes is changing from negative to positive during up-market to down-market and vice-versa. These findings have important implications for banking companies, investing community and policy regulators because bank stock returns in India are not found to be significantly related with interest rate changes over the past decade. Hence changes in interest rate may not be a primary tool for affecting banking stock returns in India. The banking sector in India is not found to respond to changes in interest rates.

 


Keywords


Banking Stock Returns, Interest Rate Sensitivity, Up-Market, Down-Market, Market Risk.

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