Interest rate risk of German financial institutions: the impact of level, slope, and curvature of the term structure

Interest rate risk of German financial institutions: the impact of level, slope, and curvature of... We investigate here the sensitivity of the equity values of a large sample of German financial institutions to movements in the term structure of interest rates. While similar approaches rely on a single interest rate factor only, we quantify the exposure to changes in level, slope, and curvature, which are the driving factors of term structure changes. Our main findings are: (i) banks and insurances are exposed to level and curvature changes but only marginally to slope movements; (ii) the interest rate risk exposure depends on the banking sector investigated; (iii) level and curvature changes are priced in the cross-section of stock returns. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Interest rate risk of German financial institutions: the impact of level, slope, and curvature of the term structure

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Publisher
Springer Journals
Copyright
Copyright © 2009 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-008-0104-9
Publisher site
See Article on Publisher Site

Abstract

We investigate here the sensitivity of the equity values of a large sample of German financial institutions to movements in the term structure of interest rates. While similar approaches rely on a single interest rate factor only, we quantify the exposure to changes in level, slope, and curvature, which are the driving factors of term structure changes. Our main findings are: (i) banks and insurances are exposed to level and curvature changes but only marginally to slope movements; (ii) the interest rate risk exposure depends on the banking sector investigated; (iii) level and curvature changes are priced in the cross-section of stock returns.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Feb 24, 2009

References

  • Interest rate changes and common stock returns of financial institutions: revisited
    Bae, SC
  • The interest rate exposure of nonfinancial corporations
    Bartram, SM
  • Expectations, interest rates and commercial bank stocks
    Booth, JR; Officer, DT
  • Interest rate risk and equity values of life insurance companies: a GARCH-M model
    Brewer, E; Carson, JM; Elyasiani, E; Mansur, I; Scott, WL
  • A study of empirical return generating models: a market model, a multifactor-model, and a unified model
    Chang, SJ

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