The impact of the yield curve on bank equity returns: Evidence from Canada

Authors

Robert N. Killins
Peter V. Egly, The University of Texas Rio Grande ValleyFollow
Sourav Batabyal

Document Type

Article

Publication Date

2021

Abstract

We examine the reaction of Canadian banks equity returns to changes in yield curve spreads. We find that Canadian banks equity returns are positively impacted by contemporaneous (and lagged) yield curve spreads. Our results also suggest that Canadian banks have become more sensitive to changes in the slope of the yield curve in the post 2007-2009 financial crisis. We also find an asymmetric impact of the slope of the yield curve on Canadian bank equity returns. For equity investors, the yield curve’s relevance varies with spreadmaturities. Our findings have important implications for the estimations of banks’ cost of capital and implicitly suggest regulatory incentives in favor of macro-prudential policy to evaluate bank risk. Swings in yield curve spreads could induce shifts in banks’ profit-seeking behavior towards non-interest income sources.

Comments

© 2020 Published by Elsevier.

Recommended Citation

Killins, R.N., Egly, P.V., Batabyal, S., 2021. The impact of the yield curve on bank equity returns: Evidence from Canada. The Quarterly Review of Economics and Finance. https://doi.org/10.1016/j.qref.2021.06.016

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Publication Title

The Quarterly Review of Economics and Finance

DOI

10.1016/j.qref.2021.06.016