This paper aims to investigate the impacts on banks’ stock returns due to changes in interest rate, exchange rate and market returns. This study also aims to examine whether the volatility of stock returns in the past has any impact on the volatility of today’s stock returns. The raw data are taken from several sources such as Eikon DataStream and Central Bank of Malaysia website. We test on seven (7) main Malaysian banks’ stocks and the Finance Index as a proxy for the bank portfolio, which are listed on the Bursa Malaysia covering daily data from January 2015 to December 2019. We begin with the descriptive statistics analysis and further, we employ Ordinary Least Squares (OLS) estimation to examine the impacts of changes in the economic variables on the bank stocks and portfolio returns. Then, we apply the Generalized Autoregressive Conditional Heteroscedasticity (GARCH 1,1) estimation to determine the relationship between the volatility of stock returns in the past with the volatility of the current. The market return has positive impacts on the portfolio and individual banks stock returns. The portfolio and banks stock returns are found to be more sensitive towards the changes in the market return than the changes in the foreign exchange and interest rates. The GARCH estimation shows the existence of time-varying conditional volatility of the bank stock returns. In addition, there is a prolonged existence of volatility shocks and the volatility reaction decomposes at a moderate pace. The GARCH parameter is significantly larger than the ARCH parameter that proves the volatility of bank stock returns is more sensitive to its own lagged values than to the new shocks. The findings have policy implications either at the banks’ management level and policy makers. The stock market investors and academic researchers will also benefit from this study.
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In-Text Citation: (Isa et al., 2021)
To Cite this Article: Isa, M. A. M., Ismail, N., Latif, R. A., & Samsudin, S. (2021). Sensitivity of Banks’ Stock Returns to the Changes in The Market, Interest and Exchange Rates: Evidence from Malaysia. International Journal of Academic Research in Accounting Finance and Management Sciences, 11(1), 256-270.
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