The sensitivity of bank stock price to interest rate changes: Empirical evidence from Finland, Sweden and Germany

Abstract

Aim of this master’s thesis is to investigate whether the changes in interest rate, long and short maturity, take effect to the market price of bank stocks in Finland, Sweden and Germany. There were created a framework for both, long and short maturity interest rate signal to stock markets within banking industry. When linear regression analysis was used, there was found a significant positive relationship between short maturity interest rate monthly changes and changes during same periods in market price of bank stock portfolio in Finland and Sweden. Changes in short maturity interest rate had no significant effect in banking industry at the German markets.

Long term interest rates did not have any significant effect to banking industry stock prices during test period. As a short term interest rate was used twelve months European Interbank Offered Rate and as long term interest rates were used ten year Government bond interest rates. There was made three portfolios of bank stocks, one in each country. Results supported the theory well in the case of short interest rates. Despite the earlier evidence of long term interest rate effect to stock market, it appeared that there was no significant effect within banking industry.

According the theoretical framework, short term interest rates and the long term interest rates have inverse effect to bank stock prices. Empirical evidence that short and long maturity interest rates correlated positively during the test period and also that short term interest rate had larger volatility is suggested as explanation for the result that long term interest rate did not have effect to market price of bank stock portfolios.