-Vikalpa: The Journal for Decision Makers
In the pre-financial liberalization era,
interest rates were administered and exhibited near-zero volatility. The easing
of financial repression in the 1990s generated experience with interest rate
volatility in India. Thereafter, administrative restrictions on interest rates
in India have been steadily eased since 1993. This has led to an increased
interest rate risk for financial firms. Stock returns sensitivity to interest
rates was theoretically advocated by Stone (1974).
He developed the
two-index model by incorporating the interest rate risk as an extra factor for
explaining the stock returns of financial companies. Interest rate risk is an
important concern for financial firms 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.
Literature too shows a strong relationship between
the stock returns of financial institutions and interest rates. The bulk of the
research has almost exclusively focused on developed countries especially
the banking sector in the United States. This study contributes to the related
literature by studying the interest rate sensitivity of non-banking financial
company’s (NBFC) stock returns in India.
OBJECTIVES OF THE
STUDY
- To examine whether stock returns of NBFCs
in India exhibit significant sensitivity to interest rate changes.
- To examine whether stock returns of NBFCs
in India exhibit significant sensitivity to unanticipated changes in
interest rate.
- To examine whether the interest rate
sensitivity is uniform across financial institutions examined in the
study.
- To investigate possible determinants that the account in favor of cross-sectional heterogeneity, if uniformity is rejected.
Hence,
cross-sectional heterogeneity exists across banks for their interest rate
exposure. Literature provided substantial evidence for stock returns exhibiting
statistically significant inverse relationship with interest rate changes (Alam
& Salahuddin, 2009; Asprem,
1989; Ballester,
Ferrer, & Gonzalez, 2011; Ballester
et al., 2009; Benink
& Wolff, 2000; Kasman,
Vardar, & Gokce, 2011; Kwan,
1991; J. D.
Moss & G. J. Moss, 2010; Park
& Choi, 2011).
.
.
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