Financial Stocks Returns Drivers in Advanced Economies in the Era of Low Interest Rates

This paper is devoted to the analysis of financial stock returns’ drivers in developed markets. For these purposes the GARCH-M model is estimated on a monthly data in the period from 1990 to 2022. It is shown how the sensitivity of financial stock quotes to several risk factors evolved in the era of ultra-loose monetary policy, exemplified by the commercial banks of the US and the UK. Thus, in the low interest rates environment banks’ share prices tend to grow when the overall level of interest rates rises. At the same time, an increase in the slope of the yield curve, previously insignificant factor, appears to be a positive driver of US banks’ stock returns. A possible explanation for such a behaviour is that the low interest rates environment creates a pressure on banks’ interest rate incomes. This may be an evidence for the presence of some harmful side effects of the ultra-loose monetary policy. On the other hand, no signs of increased bank risk-taking were found as the equity risk-premium does not rise. Nevertheless, time-varying risk-premium surges in the periods of high volatility, and the shocks appear to be highly persistent.