IDEAS home Printed from https://ideas.repec.org/a/eee/revfin/v30y2016icp23-32.html
   My bibliography  Save this article

Conditional interest rate risk and the cross-section of excess stock returns

Author

Listed:
  • Atanasov, Victoria

Abstract

Differences in excess stock returns can be rationalized by their sensitivities to conditional interest rate risk. Value stocks are particularly sensitive to upside movements in interest rate growth, while growth stocks react strongly to downside movements in interest rate growth. Consistent with the basic asset pricing theory, the upside interest rate risk commands a negative premium which is higher than the premium associated with the downside interest rate risk. Upside beta pertains its explanatory power after controlling for exposure to regular unconditional interest rate and various sources of financial and conditional macroeconomic risk.

Suggested Citation

  • Atanasov, Victoria, 2016. "Conditional interest rate risk and the cross-section of excess stock returns," Review of Financial Economics, Elsevier, vol. 30(C), pages 23-32.
    • Handle: RePEc:eee:revfin:v:30:y:2016:i:c:p:23-32
    DOI: 10.1016/j.rfe.2016.02.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1058330015300938
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.rfe.2016.02.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    2. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    3. Balvers, Ronald J. & Huang, Dayong, 2009. "Money and the C-CAPM," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(2), pages 337-368, April.
    4. Jagannathan, Ravi & Wang, Zhenyu, 1996. "The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
    5. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
    6. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-265, April.
    7. Thorbecke, Willem, 1997. "On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-654, June.
    8. Mankiw, N Gregory & Shapiro, Matthew D, 1986. "Risk and Return: Consumption Beta versus Market Beta," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 452-459, August.
    9. Jensen, Gerald R. & Mercer, Jeffrey M. & Johnson, Robert R., 1996. "Business conditions, monetary policy, and expected security returns," Journal of Financial Economics, Elsevier, vol. 40(2), pages 213-237, February.
    10. Bento J. Lobo, 2002. "Interest Rate Surprises and Stock Prices," The Financial Review, Eastern Finance Association, vol. 37(1), pages 73-91, February.
    11. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    12. Perez-Quiros, Gabriel & Timmermann, Allan, 2001. "Business cycle asymmetries in stock returns: Evidence from higher order moments and conditional densities," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 259-306, July.
    13. Victoria Dobrynskaya, 2014. "Downside Market Risk of Carry Trades," Review of Finance, European Finance Association, vol. 18(5), pages 1885-1913.
    14. Atanasov, Victoria & Nitschka, Thomas, 2014. "Currency excess returns and global downside market risk," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 268-285.
    15. Andrew Ang & Joseph Chen & Yuhang Xing, 2006. "Downside Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1191-1239.
      • Andrew Ang & Joseph Chen & Yuhang Xing, 2005. "Downside risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    16. R. Jared Delisle & James S. Doran & David R. Peterson, 2011. "Asymmetric pricing of implied systematic volatility in the cross‐section of expected returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(1), pages 34-54, January.
    17. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
    18. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    19. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.
    20. Chan, K C & Foresi, Silverio & Lang, Larry H P, 1996. "Does Money Explain Asset Returns? Theory and Empirical Analysis," Journal of Finance, American Finance Association, vol. 51(1), pages 345-361, March.
    21. James Peery Cover, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1261-1282.
    22. Shiu‐Sheng Chen, 2007. "Does Monetary Policy Have Asymmetric Effects on Stock Returns?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 667-688, March.
    23. Fama, Eugene F. & French, Kenneth R., 2012. "Size, value, and momentum in international stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 457-472.
    24. Lettau, Martin & Maggiori, Matteo & Weber, Michael, 2014. "Conditional risk premia in currency markets and other asset classes," Journal of Financial Economics, Elsevier, vol. 114(2), pages 197-225.
    25. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 354, European Central Bank.
    26. Lioui, Abraham & Poncet, Patrice, 2004. "General equilibrium real and nominal interest rates," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1569-1595, July.
    27. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
    28. Lioui, Abraham & Maio, Paulo, 2014. "Interest Rate Risk and the Cross Section of Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(2), pages 483-511, April.
    29. Lewellen, Jonathan & Nagel, Stefan, 2006. "The conditional CAPM does not explain asset-pricing anomalies," Journal of Financial Economics, Elsevier, vol. 82(2), pages 289-314, November.
    30. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-286, April.
    31. Basistha, Arabinda & Kurov, Alexander, 2008. "Macroeconomic cycles and the stock market's reaction to monetary policy," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2606-2616, December.
    32. Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Abstract: Capital Market Equilibrium in a Mean-Lower Partial Moment Framework," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 635-635, November.
    33. Lobo, Bento J, 2000. "Asymmetric Effects of Interest Rate Changes on Stock Prices," The Financial Review, Eastern Finance Association, vol. 35(3), pages 125-143, August.
    34. Jensen, Gerald R. & Johnson, Robert R., 1995. "Discount rate changes and security returns in the U.S., 1962-1991," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 79-95, April.
    35. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    36. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
    37. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    38. Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Capital market equilibrium in a mean-lower partial moment framework," Journal of Financial Economics, Elsevier, vol. 5(2), pages 189-200, November.
    39. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    40. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    41. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
    42. Jansen, Dennis W. & Tsai, Chun-Li, 2010. "Monetary policy and stock returns: Financing constraints and asymmetries in bull and bear markets," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 981-990, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Victoria Atanasov, 2016. "Conditional interest rate risk and the cross‐section of excess stock returns," Review of Financial Economics, John Wiley & Sons, vol. 30(1), pages 23-32, September.
    2. Andrew Detzel, 2017. "Monetary Policy Surprises, Investment Opportunities, And Asset Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 40(3), pages 315-348, September.
    3. Ludvigson, Sydney C., 2013. "Advances in Consumption-Based Asset Pricing: Empirical Tests," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 799-906, Elsevier.
    4. Li Gu & Dayong Huang, 2013. "Consumption, Money, Intratemporal Substitution, And Cross-Sectional Asset Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(1), pages 115-146, January.
    5. Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, 2010. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," Working Papers 2011_22, Business School - Economics, University of Glasgow, revised Apr 2011.
    6. Xiao, Yuchao & Faff, Robert & Gharghori, Philip & Min, Byoung-Kyu, 2013. "Pricing innovations in consumption growth: A re-evaluation of the recursive utility model," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4465-4475.
    7. Boguth, Oliver & Carlson, Murray & Fisher, Adlai & Simutin, Mikhail, 2011. "Conditional risk and performance evaluation: Volatility timing, overconditioning, and new estimates of momentum alphas," Journal of Financial Economics, Elsevier, vol. 102(2), pages 363-389.
    8. Paulo Maio, 2014. "Another Look at the Stock Return Response to Monetary Policy Actions," Review of Finance, European Finance Association, vol. 18(1), pages 321-371.
    9. Farago, Adam & Tédongap, Roméo, 2018. "Downside risks and the cross-section of asset returns," Journal of Financial Economics, Elsevier, vol. 129(1), pages 69-86.
    10. Florackis, Chris & Kostakis, Alexandros & Kontonikas, Alexandros, 2011. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," SIRE Discussion Papers 2011-31, Scottish Institute for Research in Economics (SIRE).
    11. Kwon, Ji Ho, 2024. "Bank credit, consumption risk, and the cross-section of expected returns," International Review of Financial Analysis, Elsevier, vol. 92(C).
    12. Kang, Jangkoo & Kim, Tong Suk & Lee, Changjun & Min, Byoung-Kyu, 2011. "Macroeconomic risk and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3158-3173.
    13. Alexandros Kontonikas & Alexandros Kostakis, 2013. "On Monetary Policy and Stock Market Anomalies," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 40(7-8), pages 1009-1042, September.
    14. Roussanov, Nikolai, 2014. "Composition of wealth, conditioning information, and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 111(2), pages 352-380.
    15. Sebastien Valeyre & Sofiane Aboura & Denis Grebenkov, 2019. "The Reactive Beta Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 42(1), pages 71-113, March.
    16. Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, vol. 106(3), pages 586-613.
    17. De Giorgi, Enrico G. & Post, Thierry & Yalçın, Atakan, 2019. "A concave security market line," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 65-81.
    18. Aliyu, Shehu Usman Rano, 2020. "What have we learnt from modelling stock returns in Nigeria: Higgledy-piggledy?," MPRA Paper 110382, University Library of Munich, Germany, revised 06 Jun 2021.
    19. Roh, Tai-Yong & Lee, Changjun & Min, Byoung-Kyu, 2019. "Consumption growth predictability and asset prices," Journal of Empirical Finance, Elsevier, vol. 51(C), pages 95-118.
    20. Kim, Dongcheol & Kim, Tong Suk & Min, Byoung-Kyu, 2011. "Future labor income growth and the cross-section of equity returns," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 67-81, January.

    More about this item

    Keywords

    Stock returns; Interest rates; Conditional risk;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:revfin:v:30:y:2016:i:c:p:23-32. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620170 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.