RISK MANAGEMENT THOUGHT LEADERSHIP

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Prometeia at the 2018 International Conference on Economics of Turkish Economic Association

Antalya, 1-3 November 2018

Human Capital, Innovative Industries and Employment

 

Could a Fed rate hike affect Turkish banks’ stock price? Could it lead to an increase in interest rate risk exposures of Turkish banks, generating negative spillover effects? 

Prometeia is attending the 2018 International Conference on Economics, organized by the Turkish Economic Association (TEA), presenting the working paper “Fed rate hikes and the effects on Turkish banking system. Could it catch a cold this time?”. 

 

Technical abstract

By means of a new data-rich environment IVAR model with both observables and latent factors for a panel of 18 countries (iDREAM), we estimate the spillover effects of a Fed rate hike on the Turkish economy through a generalized impulse-response analysis with sign restrictions.

Then, we use Kalman filter to assess Turkish banks’ stock log-returns sensitivities to both iDREAM variables (cycle, prices, real effective exchange rate and monetary policy) and Nelson-Siegel latent factors of the Turkish government term structure (so-called, level, slope and curvature).

Finally, we investigate how these time-varying sensitivities depend on bank-level characteristics and bank-ownership over the period 2006-2017.

Our preliminary findings show a strong relationship between Nelson-Siegel latent factors and banks’ log returns. In particular, a change in the level has significant effects on the Turkish banking system, while the other latent factors of the yield curve have moderate effects. Moreover, well-capitalized and resilient banks seem to be less exposed to interest rate risks.

Prometeia at the 2018 International Conference on Economics of Turkish Economic Association