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Dynamic correlation analysis of spill-over effects of interest rate risk and return on Australian and US financial firms

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  • Akhtaruzzaman, Md
  • Shamsuddin, Abul
  • Easton, Steve

Abstract

This paper examines the spill-over effects of interest rate risk and return on Australian and US financial firms using a dynamic conditional correlation GARCH model. Australian banks exhibit negative exposure to changes in both domestic and US interest rates, and US interest rate volatility is found to be an important predictor of Australian bank stock return volatility. Similar findings are obtained for the aggregate portfolio of financial stocks. The time-varying conditional correlation between Australian and US financial stock returns increases during financial crises and varies directly with net capital flows between Australia and the US. Further, the conditional correlation increases (decreases) during the contractionary (expansionary) periods of the US business cycle.

Suggested Citation

  • Akhtaruzzaman, Md & Shamsuddin, Abul & Easton, Steve, 2014. "Dynamic correlation analysis of spill-over effects of interest rate risk and return on Australian and US financial firms," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 378-396.
    • Handle: RePEc:eee:intfin:v:31:y:2014:i:c:p:378-396
    DOI: 10.1016/j.intfin.2014.04.006
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    10. Mishra, Shekhar & Mishra, Sibanjan, 2021. "Are Indian sectoral indices oil shock prone? An empirical evaluation," Resources Policy, Elsevier, vol. 70(C).
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    13. Lyócsa, Štefan & Molnár, Peter & Plíhal, Tomáš, 2019. "Central bank announcements and realized volatility of stock markets in G7 countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 58(C), pages 117-135.
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    More about this item

    Keywords

    Financial firms; Interest rate risk; Dynamic conditional correlation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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