Examine Banks’ Share Price Sensitivity Due to Interest Rate Changes: Emerging Markets and Advanced Countries

Abstract

This study examines the impacts of interest rate on banks’ return in 14 international markets. This research covers seven financial ratios as dependent variables as well as the return of the bank. Moreover, size of the banks is a control variable. The sample of data is from 2001 until the end of 2010 and all the ratios collected annually. LM and Hausman test carried out and the results indicate that the data is Random Panel. The regression (OLS) results demonstrated that the behavior of banks towards the changes in interest rate heavily depends on the market that the banks are operating. Since there are several unique economical and financial characteristics for each country, the reaction of banks to changes in interest rate varies from one market to another. Regarding the size of the bank as control variable, only for five 5 out of 14 of countries there is a significant impact of size on the bank’s return.

Keywords: bank return, Interest rate, financial ratios, monetary policy, emerging markets, advanced markets, bank risk, control variable, size of the bank, total assets

JEL Classification: C1, C3, E4, G2