Innovations in Interest Rates, Duration Transformation, and Bank Stock Returns

Abstract

This paper studies the cross-sectional variation in the sensitivity of bank stock returns to interest-rate innovations. An econometric framework is developed to estimate the mismatch between asset and liability durations. The innovation sensitivity is then related to duration transformation. The results indicate that banks are exposed to interest-rate risk and that the innovation sensitivity is positively related to duration transformation. Copyright 1992 by Ohio State University Press.

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