The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions

ABSTRACT This paper examines the relation between the interest rate sensitivity of common stock returns and the maturity composition of the firm's nominal contracts. Using a sample of actively traded commerical banks and stock savings and loan associations, common stock returns are found to be correlated with interest rate changes. The co‐movement of stock returns and interest rate changes is positively related to the size of the maturity difference between the firm's nominal assets and liabilities.