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Sector Rotation and Interest Rate Policy

Author

Listed:
  • Phillip C. James

    (College of Business and Management, School of Business Administration, University of Technology, Jamaica,)

  • Il-woon Kim

    (Professor of Accounting & International Business, George W. Daverio School of Accountancy, College of Business Administration, The University of Akron, Akron,)

  • John J. Cheh

    (George W. Daverio School of Accountancy, College of Business Administration, The University of Akron, Akron, OH 44325-4802,)

Abstract

This paper investigates the efficiency of equity allocation strategy based on changes in the U.S. prime bank rate. A sector rotation strategy based on changes in interest rates is one of the ways investors can maximize their returns. The study used the U.S. monthly bank prime loan rate from January 31, 1949 to December 31, 2012 as the indicator variable for interest rate changes, and changes in the rate were labeled as either expansive or restrictive policy shifts. The study evaluates the monthly returns equally weighted (including distributions) of U.S. equity stocks listed in the CRSP data base. Betas were obtained by regressing the monthly equally weighted returns against the monthly Dow Jones industrial index. The results show that a sector rotation strategy based on changes in monetary policy particularly interest rate adjustments can significantly improve the performance of an investor’s portfolio.

Suggested Citation

  • Phillip C. James & Il-woon Kim & John J. Cheh, 2014. "Sector Rotation and Interest Rate Policy," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 4(5), pages 124-130, May.
    • Handle: RePEc:mir:mirbus:v:4:y:2014:i:5:p:124-130
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    References listed on IDEAS

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    1. 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.
    2. Kenneth A. Froot & Melvyn Teo, 2004. "Equity Style Returns and Institutional Investor Flows," NBER Working Papers 10355, National Bureau of Economic Research, Inc.
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    Keywords

    Sector Rotation; Interest Rate;

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