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

Czaja, Marc-Gregor; Scholz, Hendrik; Wilkens, Marco

doi:10.1007/s11156-008-0104-9

Cited by 44 publications

(51 citation statements)

References 58 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…First, a significantly negative effect of movements in interest rates on banking firms' stock returns is generally documented, and it has been commonly attributed to the maturity mismatch between banks' assets and liabilities (Flannery and James, 1984;Elyasiani and Mansur, 1998;Au Yong and Faff, 2008;Czaja et al, 2009 and.…”

Section: Review Of Literaturementioning

confidence: 99%

Linear and nonlinear interest rate sensitivity of Spanish banks

Ballester

Ferrer

González

2011

The Spanish Review of Financial Economics

View full text Add to dashboard Cite

Interest rate risk is one of the major financial risks faced by banks due to the very nature of the banking business. The most common approach in the literature has been to estimate the impact of interest rate risk on banks using a simple linear regression model. However, the relationship between interest rate changes and bank stock returns does not need to be exclusively linear. This article provides a comprehensive analysis of the interest rate exposure of the Spanish banking industry employing both parametric and non parametric estimation methods. Its main contribution is to use, for the first time in the context of banks' interest rate risk, a nonparametric regression technique that avoids the assumption of a specific functional form. Linear and Nonlinear ABSTRACTInterest rate risk is one of the major financial risks faced by banks due to the very nature of the banking business. The most common approach in the literature has been to estimate the impact of interest rate risk on banks using a simple linear regression model. However, the relationship between interest rate changes and bank stock returns does not need to be exclusively linear. This article provides a comprehensive analysis of the interest rate exposure of the Spanish banking industry employing both parametric and non parametric estimation methods. Its main contribution is to use, for the first time in the context of banks' interest rate risk, a nonparametric regression technique that avoids the assumption of a specific functional form. One the one hand, it is found that the Spanish banking sector exhibits a remarkable degree of interest rate exposure, although the impact of interest rate changes on bank stock returns has significantly declined following the introduction of the euro. Further, a pattern of positive exposure emerges during the post-euro period. On the other hand, the results corresponding to the nonparametric model support the expansion of the conventional linear model in an attempt to gain a greater insight into the actual degree of exposure. J.E.L. Classification: G12, G21, C52Keywords: interest rate risk, banking firms, stocks, nonparametric regression techniques. Corresponding author. Departamento de Economía Financiera y Actuarial, Universidad de Valencia, Facultad de Economía, Avda. Tarongers, s/n, 46022 Valencia, Spain. Laura.Ballester@uv.es. Laura Ballester would like to express her gratitude for the funding received from the JCCM, proyecto PEII11-0031-6939. The authors would like to thank Alfonso Novales, Juan Nave, Ángeles Fernández, Paz Jordá, Miguel Ángel Martínez, Joaquín Maudos, and Eliseo Navarro for their valuable comments and suggestions. The authors are also grateful to the two anonymous referees for their comments that have contributed to improve this paper. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 6...

show abstract

Section: Review Of Literaturementioning

confidence: 99%

Linear and nonlinear interest rate sensitivity of Spanish banks

Ballester

Ferrer

González

2011

The Spanish Review of Financial Economics

View full text Add to dashboard Cite

show abstract

“…Second, numerous authors have observed that the factors (level, slope and curvature) extracted from the NS model are insensitive to the choice of τ (see, among others, Nelson and Siegel 1987;Barrett et al 1995;Willner 1996;Dolan 1999;Czaja et al 2009;Favero et al 2012). More recently, Annaert et al (2013) estimated the parameters of the NS model for τ fixed at 1.37 (as in Diebold and Li 2006), and for τ fixed at 3 (as in Fabozzi et al 2005) for Euro spot rate curves, obtaining very similar results and being unable to conclude which of the two τ values is more suitable.…”

Section: Methodology and Datamentioning

confidence: 99%

Fixed income strategies based on the prediction of parameters in the NS model for the Spanish public debt market

Félix

Fernández-Pérez

Rodríguez

2015

SERIEs

View full text Add to dashboard Cite

Using different econometric models, Diebold and Li (J Econom 130:337-364, 2006) addressed the practical problem of forecasting the yield curve by predicting the factors level, slope and curvature in the Nelson-Siegel framework. This paper has two main aims: on the one hand, to investigate the predictive possibilities of the yield curve for the Spanish public debt market, using the methodology proposed by Diebold and Li (J Econom 130:337-364, 2006); and on the other hand, to study the capability of generating profits by transforming these yield curve predictions into technical trading strategies. The Sharpe ratios of our strategies outperform the hedging strategy benchmarks for long (1 year) horizons in our prediction period (2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010) and also for the current crisis period (2008)(2009)(2010). Nevertheless, these strategies do not outperform their benchmarks for short (1 month) horizons. The introduction of nonparametric models improves the profitability of the strategies in terms of the Sharpe ratio, especially in the 1-year-ahead predictions. This finding is in line with Diebold and Li (J Econom 130:337-364, 2006), whose forecasts for long horizons are much more accurate than those of several standard benchmark models.

show abstract

“…This analysis shows that banks' market valuations were not affected by the holding of government debt by Italy, Spain, Portugal and Ireland. Finally, statistical analyses (Flannery & James, 1984;Czaja et al, 2009) find that bank stock returns are more sensitive to interest rate changes than the stock returns of other companies.…”

Section: Literature Reviewmentioning

confidence: 99%

What Influences Bank Stock Prices in Times of Crisis? An International Survey

Pacelli¹

2017

IJEF

View full text Add to dashboard Cite

The paper assesses whether the European banks' stock prices are predicted or affected by changes in balance-sheet indicators and macroeconomic variables. The sample covers the time period from January 2007 to December 2013. Estimates use the multiple regression model based on the weighted least squares (WLS) estimator. Results show that the stock prices of European banks are positively related to asset quality, liquidity and banks' capital ratios. However, in the same period, inflation rate and public debt exert a negative and significant effect on bank stock prices. Our findings are more significant in times of high market turbulence as have been experienced for almost a decade. These have provoked the investors' perceptions to be more unstable and volatile. The availability of information remains limited and poor. Therefore, it is necessary to emphasize that identifying the causal determinants of stock prices in the markets could generate important practical and policy implications because of the role played by banks in financing the economic system, and will also attract investors (Note 1).

show abstract

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

Abstract: German financial institutions, Interest rate sensitivity, Term structure, Nelson–Siegel approach, G12, G21, G22,

Cited by 44 publications

References 58 publications

Linear and nonlinear interest rate sensitivity of Spanish banks

Linear and nonlinear interest rate sensitivity of Spanish banks

Fixed income strategies based on the prediction of parameters in the NS model for the Spanish public debt market

What Influences Bank Stock Prices in Times of Crisis? An International Survey

Contact Info

Product

Resources

About