Journal of Organisational Studies and Innovation
Vol. 1, no.1, summer, 2014
The Effect of Interest Rate Risk on the Stock Prices of UK Financial Institutions
Eslyn Hernandez and Sharif A. Sheriff
University of West London

Abstract: There is vast research on the effect of interest rate risk on the US stock returns of financial institutions; however, there has been limited research on British bank stock returns and interest rate sensitivity. The aim of this paper is to investigate the effect of interest rate risk on the stock prices of UK financial institutions and the effect interest rate risk has on policy makers. This paper considers 8 (eight) UK financial institutions between the years 1997-2014.

The methodology uses the Stone’s Two Index Model to test for the significance of such risk.  The results found several structural breaks in the data; however there still remains a strong correlation between stock price returns and interest rate risk, particularly those involved in sub-prime mortgage operations. The evidence shows that interest rate risk has a significant impact on the stock prices returns through monetary policy transmission. It also indicates that interest rate risk affects the decisions of policymakers at the strategic level.

Keywords: Interest Rate Risk, Stock Prices, Monetary Transmission Mechanism, Credit Channel, Balance Sheet Channel, Stone’s Two Index Model.