The impact of interest rate and exchange rate volatility on banks' stock returns and volatility: Evidence from Turkey

KASMAN S., Vardar G., Tunc G.

ECONOMIC MODELLING, vol.28, no.3, pp.1328-1334, 2011 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 28 Issue: 3
  • Publication Date: 2011
  • Doi Number: 10.1016/j.econmod.2011.01.015
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.1328-1334
  • Keywords: Market risk, Interest rate risk, Foreign exchange risk, Bank stock returns, GARCH, INTEREST-RATE RISK, COMMON-STOCK, 2-INDEX MODEL, SENSITIVITY, INSTITUTIONS, MARKET, LEVEL
  • Dokuz Eylül University Affiliated: Yes


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. (C) 2011 Elsevier B.V. All rights reserved.