Interest Rate Sensitivity of Bank Stock Returns: Specification Effects and Structural Changes

In this paper the interest rate sensitivity of bank stock returns under alternative econometric specifications and the changes in the sensitivity over time are studied. Results indicate that the sensitivity depends on the econometric specification and the period considered. Bank stock returns show a sensitivity to long‐term government security returns and innovations, but not to short‐term government security returns and innovations except under one specification. Since 1980, banks seem to have reduced their interest rate risk exposure. Finally, while long‐term returns are positively associated with stock returns, short‐term returns show a positive association only since 1980.