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Analysis of the Interest Rate Sensitivity of Common Stocks

Frank K. Reilly, David J. Wright and Robert R. Johnson
The Journal of Portfolio Management Spring 2007, 33 (3) 85-107; DOI: https://doi.org/10.3905/jpm.2007.684757
Frank K. Reilly
The Bernard J. Hank professor in the Mendoza College of Business at the University of Notre Dame in Notre Dame, IN.
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  • For correspondence: Reilly.1@nd.edu
David J. Wright
A professor of finance in the College of Business and Technology at the University of Wisconsin—Parkside in Kenosha, WI.
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  • For correspondence: Wright@UWP.edu
Robert R. Johnson
A managing director of the CFA Institute in Charlottesville, VA.
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  • For correspondence: bob.johnson@cfainstitute.org
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Abstract

The association between interest rate changes and stock returns has long been of interest to investors, all the more so recently as investors and the financial and popular press have zeroed in on the effect of Federal Reserve actions on interest rates. The interest rate sensitivity of common stocks can be measured using an alternative specification of duration, empirical duration, a measure that has become accepted by fixed-income analysts and portfolio managers. Analysis of the interest rate sensitivity of the aggregate stock market considers alternative economic sectors and many industries and stock indexes that reflect different sizes and investment styles. Five important results are documented: 1) dramatic changes over time in the empirical duration of common stocks; 2) substantial differences in the total-period empirical duration for different economic sectors and different industries; 3) a significant negative relation between market risk and interest rate risk for different industries; 4) significantly different patterns of empirical duration over time for different sectors and industries; and 5) differences in interest rate sensitivity for various economic sectors, industries, and investment styles that are generally consistent with economic expectations.

TOPICS: Security analysis and valuation, legal/regulatory/public policy

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Vol. 33, Issue 3
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Analysis of the Interest Rate Sensitivity of Common Stocks
Frank K. Reilly, David J. Wright, Robert R. Johnson
The Journal of Portfolio Management Apr 2007, 33 (3) 85-107; DOI: 10.3905/jpm.2007.684757

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Analysis of the Interest Rate Sensitivity of Common Stocks
Frank K. Reilly, David J. Wright, Robert R. Johnson
The Journal of Portfolio Management Apr 2007, 33 (3) 85-107; DOI: 10.3905/jpm.2007.684757
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