Financial Risk Management
A Study of the Movement of Interest Rates and Spillover of Volatility and Returns Amongst the Leading Bank Stocks in India

Article Details
Pub. Date : Dec, 2019
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM11912
Author Name : Rakesh Shahani and Nikhil Nagpal
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 16



The present study is an attempt to empirically investigate the impact of interest rates and foreign exchange rates on the movement of banking stocks in India (two from public sector and two from the private sector) for the period April 2013-March 2018 (weekly returns data). The study further makes an attempt to find out whether and to what extent different banks impact each other’s return and volatility. The econometric tools employed to study the relation include OLS relation between the variables, GARCH(1, 1) methodology to determine the volatility spillover, autocorrelation and heteroscedasticity tests, and also Augmented Dickey-Fuller unit root tests. The results of the study show that the return of all the banks is mainly dependent on the return on Bank Nifty Index, while change in interest rate (91-day Treasury Bills) is not found to be influencing the return of any of the four banks. Evidence of spillover of return was seen more from the private sector banks to public sector bank’s stocks. However, in case of spillover of volatility, there is evidence of bilateral spillover between ICICI Bank and PNB stocks. Also HDFC Bank’s volatility was seen to impact SBI’s volatility, while no impact was seen of any bank’s stock on the volatility of HDFC Bank’s stock. Further, OLS regression does not suffer from autocorrelation and heteroscedasticity. The bank returns were found to be stationary for all the variables.


Amongst the various sectors which constitute the Indian stock market, the banking sector is viewed as one of the most volatile. This is so because the stock prices of this sector are driven not only by the fundamentals which are specific to the banking company but these stocks are also deeply impacted by the movement of other financial variables like changes in the interest rates, movement in crude prices, rupee-dollar exchange rate, etc. Out of these factors, change in the interest rates is quite an important risk for a portfolio manager and for most managers interest rate risk management is as important as management of market risk.


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