Market, interest rate, and exchange rate risk effects on financial stock returns during the financial crisis: AGARCH-M approach

Abstract

Our aim is to investigate the sensitivity of financial sector stock returns to market, interest rate, and exchange rate risk in three financial sectors (financial services, banking, and insurance) in eight countries, including various European, the US, and China economies, over the period 2006–2009 during the financial crisis. The econometric framework is a four-variate GARCH-in-mean model and volatility spillovers. The empirical results show the significant effects (positive and negative, respectively) of the stock market returns, interest rate, and exchange rate volatility of the financial sector during the crisis. Besides, we find, in most cases, significant (positive and negative, respectively) volatility spillovers from market return, interest rate, exchange rate, and interest rate in the financial services and the banking sector both in the European and the US economies during the financial crisis.

Keywords:

• exchange rate
• interest rate
• multivariate GARCH
• volatility
• financial sector stock returns
• market linkages in the post-crisis world

Public Interest Statement

The main purpose of this article is to improve the explanatory power of the financial review; the author’s objectives include highlighting the role played by the exchange rates, interest rates, and the financial stock return that affect the volatility of stock market.

This study is considered the first of its kind conducted in the context of the financial crisis. Studying the impact market, interest rate, and exchange rate risk effects on the financial stock returns could provide valuable information to portfolio management for both national and international. This study will help investors achieve and monitor more closely the monetary policy to make decisions on their investments as interest and exchange rates have predictive powers on the bank volatility stock returns.

Additional information

Funding

Funding. The authors received no direct funding for this research.

Notes on contributors

Aloui Mouna

Aloui Mouna, PhD, is an associate researcher at LARTIGE (Laboratory of Research) in the University of Sfax, Tunisia. Her research interests are in financial, economic education finance market, and corporate governance.

Jarboui Anis

Jarboui Anis, PhD, is a professor of finance and accounting at the University of Sfax, Tunisia. His research interests are in corporate governance, financial literacy, and behavioral finance.