تاثیر نرخ بهره و نوسانات نرخ ارز بر بازده سهام بانک ها و نوسانات: مدارک گرفته شده از ترکیه

This paper investigates the effects of interest rate and foreign exchange rate changes on Turkish banks' stock returns using the OLS and GARCH estimation models. The results suggest that interest rate and exchange rate changes have a negative and significant impact on the conditional bank stock return. Also, bank stock return sensitivities are found to be stronger for market return than interest rates and exchange rates, implying that market return plays an important role in determining the dynamics of conditional return of bank stocks. The results further indicate that interest rate and exchange rate volatility are the major determinants of the conditional bank stock return volatility.

In recent years, the liberalization of financial markets has caused exposure to many sources of risk. The impact of interest rate and exchange rate changes on banks' stock returns has been of major interest to bank managers, regulatory authorities, academic communities and investors, since the failure of numerous banks has been especially attributed to the adverse impacts of fluctuations in interest rates and exchange rates. The sensitivity of bank stock returns to interest rate and exchange rate changes can be theoretically explained with several models and hypothesis. Initially, with reference to the intertemporal capital asset pricing model (ICAPM) of Merton (1973), the interest rate risk may be included in the model (ICAPM) as one-possible extra market factor, since a change in the interest rate may represent a shift in the investment opportunity set. Therefore, investors require additional compensation for bearing the risk of such changes. Also, the implications of Arbitrage Pricing Theory (APT) can provide evidence of whether interest rate (Sweeney and Warga, 1986) or exchange rate risk are priced factors in the equilibrium price of bank stocks. In equilibrium, interest rate (Yourougou, 1990) and exchange rate sensitivities exert a significant impact on the common stocks of financial institutions,1 including banks. The nominal contracting hypothesis (Kessel, 1956, Bach and Ando, 1957 and French et al., 1983) has also been used to explain the interest rate sensitivity of banks, given the composition of their balance sheets (Flannery and James, 1984). This hypothesis suggests that the interest rate sensitivity of a bank's common stock return depends on the amount of net nominal assets held by the bank. A bank's holdings of nominal assets and nominal liabilities affect its common stock returns through wealth distribution effects caused by unexpected inflation.2 Since the internationalization process of most financial institutions have not been completed, it is more likely that both interest and exchange rate sensitivity would vary among banks. Therefore, the nationality and financial operations of the banks will affect the extent to that variation. Maturity mismatch between the assets and liabilities of banks and unexpected change in interest and exchange rates are considered as the key factors that lead to increase the risk exposure of the banks. Additionally, most financial analysts and economists agree that the revenues, costs and profitability of banks are directly influenced by the unexpected changes in interest rates and exchange rates (Saunders and Yourougou, 1990). With the financial market liberalization process, most of the banks generally carry out their operations in foreign countries and are exposed to the interest rate risk because of volatile financial market conditions in recent years. Therefore, interest rate and exchange rate changes could have an adverse effect on the viability of banks because their impacts cannot be eliminated through risk management techniques (Gilkenson and Smith, 1992). Banking institutions can reduce their interest rate and exchange rate risk exposures by engaging in various off-balance sheet activities and implementing effective risk management techniques. However, financial institutions in emerging countries are more vulnerable due to their inadequacy in such instruments and techniques. It is not surprising that these countries are more often faced with serious financial crises. Hence it is worthwhile to investigate the interest rate and exchange rate exposures of banks in emerging market countries as the results can have important implications on financial stability and policy formulation for banking and regulatory communities. Despite the clear importance of an understanding of the impact of interest and exchange rates on the bank stock returns, surprisingly, only a few papers have investigated explicitly the joint interaction of the interest and exchange rates on bank stock returns and volatility in the context of emerging markets. However, the majority of studies on this issue have been concentrated in developed markets. Hence, the objective of this study is to contribute to the related literature by studying the sensitivity of bank stock returns to interest and exchange rates changes using data from a major emerging market. Turkey, which is considered an emerging market, has witnessed significant developments in its banking system since financial crisis of 2001. As is the case in most emerging markets, the high interest rates and exchange rate fluctuations have been characteristics of the Turkish economy for a long time. The large maturity gaps and short positions in foreign exchange on the balance sheets and duration gaps during the crisis resulted in a significant amount of erosion of their capital. Hence, the main objective of this study is to investigate the sensitivity of a sample of Turkish banks' stock returns to interest rate and exchange rate changes over the period 1999–2009, using both standard OLS method and GARCH model. The contribution of this paper to the related literature is three-fold: first, to the authors' best knowledge, this is the first study that has conducted an in-depth investigation regarding joint interest rate and exchange rate risks on the Turkish banks' stock returns. The study is based on daily data rather than monthly data, since daily data provide stronger evidence of the sensitivity of bank stock returns to both interest rate and exchange rate changes. Second, it utilizes two different econometric approaches, the standard OLS and GARCH model, to enhance the analysis. In this way, the comparison of the empirical results dictates the extent to which the empirical results are reliable and also the usefulness of the estimated parameters. Third, the time period examined covers a unique large and recent data set, which is characterized by the inclusion of financial and economic crises in Turkey. The remainder of paper is organized as follows. Section 2 presents the literature review. Section 3 discusses the data. Methodology is presented in Section 4. Section 5 discusses the empirical results. Finally, Section 6 provide conclusions.

An investigation of the impact of interest rates and exchange rates on bank stock returns and volatility has been of special importance in recent years as a consequence of shifts in monetary policy regimes, free capital flows, financial and technological developments in communications, and trading systems. Therefore, this study examines the simultaneous interest rate, exchange rate and market risk on bank stock return by employing both OLS and GARCH estimation models. However, due to the existence of residual autocorrelation in the data, the GARCH model produces more efficient coefficients than OLS. Application of time-varying risk models also enables us to introduce volatility of interest and exchange rates into the bank stock return volatility generating process. The results of this paper indicate that interest rate and exchange rate changes have a negative and significant impact on the conditional bank stock return. Also, bank stock return sensitivities are found to be stronger for market return than interest rates and exchange rates, implying that market return plays an important role in determining the dynamics of conditional return of bank stocks. The results further indicate that interest rate and exchange rate volatility are found to be a major determinant in the conditional bank stock return volatility. Hence, our evidence suggests that variation in interest and exchange rate risk can explain the observable bank characteristics that are relevant for interested parties who want to manage their risk exposure and oversee changes in exposure. Overall, these findings seem to be robust for an emerging financial market, like in Turkey, which does not provide hedging opportunities in its derivative market for interest and exchange rates risks. The findings of this paper provide important information particularly for investors in revaluing banks' stocks, for bank managers in building risk management strategies and finally for policy makers in constructing monetary policies. Hence, the findings of this paper have some policy implications. Knowing the nature of the impact of the interest and exchange rates on bank stock returns could provide valuable information for portfolio management purposes both domestically and internationally. The results suggest that investors should follow more closely the monetary policies to take decisions on their investments since interest and exchange rates have predictive powers on bank stock return and volatility. When there are changes in interest and exchange rates, investors should change the composition of their portfolios due to the sudden change in the risk-return trade off. As for the bank managers, they should also follow monetary policies when they build risk management strategies. Finally, policy makers should take the condition of banking system into account when they form monetary policies. This is crucial since the role of banking system in economic growth is significant and monetary policies can help to develop a stable and sound banking system.