jurnal internasional ainun

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.

Causal Relations Among Stock Returns, Interest Rates, Real Activity, and Inflation

Abstact

Using a multivariate vector-autoregression (VAR) approach, this paper investigates causal relations and dynamic interactions among asset returns, real activity, and inflation in the postwar United States. Major findings are (1) stock returns appear Granger-causally prior and help explain real activity, (2) with interest rates in the VAR, stock returns explain little variation in inflation, although interest rates explain a substantial fraction of the variation in inflation, and (3) inflation explains little variation in real activity. These findings seem more compatible with Fama (1981) than with Geske and Roll (1983) or with Ram and Spencer (1983).

The stochastic behavior of common stock variances: Value, leverage and interest rate effects

Abstract

This paper examines the relation between the variance of equity returns and several explanatory variables. It is found that equity variances have a strong positive association with both financial leverage and, contrary to the predictions of the options literature, interest rates. To a substantial degree, the negative elasticity of variance with respect to value of equity that is part of market folklore is found to be attributable to financial leverage. A maximum likehood estimator is developed for this elasticity that is substantially more efficient than extant estimation procedures.

Stock returns and the term structure

Abstract

In monthly U.S. data for 1959–1979 and 1979–1983, the state of the term structure of interest rates predicts excess stock returns, as well as excess returns on bills and bonds. This paper documents this fact and uses it to examine some simple asset pricing models. In 1959–1979, the data strongly reject a single-latent-variable specification of predictable excess returns. There is considerable evidence that conditional variances of excess returns change through time, but the relationship between conditional mean and conditional variance is reliably positive only at the short end of the term structure.

The Adjustment of Stock Prices to Information About Inflation

Abstract

This paper analyzes the reaction of stock prices to the new information about inflation. Based on daily returns to the Standard and Poor's composite portfolio from 1953–78, it seems that the stock market reacts negatively to the announcement of unexpected inflation in the Consumer Price Index (C.P.I.), although the magnitude of the reaction is small. It is interesting to note that the stock market seems to react at the time of announcement of the C.P.I., approximately one month after the price data are collected by the Bureau of Labor Statistics.

INTEREST RATE CHANGES AND COMMON STOCK RETURNS OF FINANCIAL INSTITUTIONS: REVISITED

Abstract

In this paper the interest rate sensitivity of common stock returns of financial firms is re-examined. Considered here are (1) current, anticipated, and unanticipated changes in interest rates; (2) depository and nondepository firms; and (3) three different-maturity interest rate indices. Results lend strong support for a negative effect of both current and unanticipated interest rate changes. Although some exceptions are observed, stock returns of most subsectors of both financial and nonfinancial firms are not sensitive to anticipated interest rate changes. The findings of this study are robust to the choice of a particular model of interest rate expectations.

 

A VARMA Analysis of the Causal Relations Among Stock Returns, Real Output, and Nominal Interest Rates

Abstract

Previous research has documented a negative relation between common stock returns and inflation. Recently, Fama [3] and Geske and Roll [6] have argued that this relation results from a more fundamental one between real activity and expected inflation. Stock returns, they argue, signal changes in real activity, which in turn affect expected inflation. However, unlike Fama, Geske and Roll argue that changes in real activity result in changes in money supply growth, which in turn affect expected inflation. Empirical tests have analyzed separately each link in the proposed causal chain. In this article, we investigate simultaneously the relations among stock returns, real activity, inflation, and money supply changes using a vector autoregressive moving average (VARMA) model. Our empirical results strongly support Geske and Roll's reversed causality model.

 

The Fiscal and Monetary Linkage between Stock Returns and Inflation

Abstract

Contrary to economic theory and common sense, stock returns are negatively related to both expected and unexpected inflation. We argue that this puzzling empirical phenomenon does not indicate causality.

Instead, stock returns are negatively related to contemporaneous changes in expected inflation because they signal a chain of events which results in a higher rate of monetary expansion. Exogenous shocks in real output, signalled by the stock market, induce changes in tax revenue, in the deficit, in Treasury borrowing and in Federal Reserve “monetization” of the increased debt. Rational bond and stock market investors realize this will happen. They adjust prices (and interest rates) accordingly and without delay.

Although expected inflation seems to have a negative effect on subsequent stock returns, this could be an empirical illusion, since a spurious causality is induced by a combination of: (a) a reversed adaptive inflation expectations model and (b) a reversed money growth/stock returns model.

If the real interest rate is not a constant, using nominal interest proxies for expected inflation is dangerous, since small changes in real rates can cause large and opposite percentage changes in stock prices.

Inflation Illusion and Stock Prices

Abstract

We empirically decompose the S&P 500's dividend yield into (1) a rational forecast of long-run real dividend growth, (2) the subjectively expected risk premium, and (3) residual mispricing attributed to the market's forecast of dividend growth deviating from the rational forecast. Modigliani and Cohn's (1979) hypothesis and the persistent use of the Fed model' by Wall Street suggest that the stock market incorrectly extrapolates past nominal growth rates without taking into account the impact of time-varying inflation. Consistent with the Modigliani-Cohn hypothesis, we find that the level of inflation explains almost 80% of the time-series variation in stock-market mispricing.

Inflation, Taxation, and Corporate Investment: A q-Theory Approach

Abstract

This paper presents an analysis of the effects of tax policy on capital accumulation and valuation based on James Tobin's q theory of investment. As Tobin has explained, aggregate investment can be expected to depend in a stable way on q, the ratio of the stock market valuation of existing capita1 to its replacement cost. For example, increases in the rate of return on physical capital raise its market value and cause increased investment until equilibrium is restored. Although models linking the stock market to investment have been estimated, they have not previously been used to examine the impact of tax policies. The basic idea underlying the approach taken here can be described quite simply. It is generally assumed that the stock market valuation of corporate capital represents the present value of its future dividend stream. In the model of this paper, the effects of tax changes on future profits are used to estimate the impact of those changes on the stock market. These estimates in turn are used as a basis for gauging the impact of the tax changes on capital formation. This approach, working through q, can provide estimates of the effects of policy announcements and of personal tax reforms as well as estimates of the distributional impact of alternative reforms. A distinct feature of the model developed here is that it is rooted in a microeconomic theory that integrates the interests of the corporation and its shareholders.