Time-Varying Market, Interest Rate and Exchange Rate Risks of Thai Commercial Banks

Abstract

This study investigates the sensitivity of the stock returns of Thai commercial banks to market, interest rate, and foreign exchange rate risks in a time-varying framework employing the GARCH approach. The empirical evidence reveals that market risk is the major component of the sensitivity of bank stock returns, with large banks being more sensitive to changes in market conditions than medium and small banks. There is also evidence to support the influence of the interest rate on bank stock returns, indicating a decline in longer-term interest rate sensitivity. The results also reveal important information regarding the Thai banking industry: banks with high market power can take advantage of interest rate changes, leading to higher profitability, indicating a positive interest rate sensitivity, while banks with low market power and less efficient banks may not efficiently manage their risk exposures, resulting in negative effects of the interest rate risk from the maturity mismatching of their assets and liabilities. The exchange rate risk is relevant for small banks, whereas large and medium banks may have adequately hedged their foreign exchange rate exposure throughout the sample period. The time-varying estimation confirms that the bank stock-return-generating process follows the GARCH model and that volatility is time variant with a relatively high value of persistence measures.