Alternative estimates of the well-known negative relationship between the US interest rate risk and the flow-through capability

Francisco Jareño; Marta Tolentino; Carlos Cano

doi:10.1016/j.heliyon.2019.e01901

Alternative estimates of the well-known negative relationship between the US interest rate risk and the flow-through capability

Heliyon. 2019 Jun 17;5(6):e01901. doi: 10.1016/j.heliyon.2019.e01901. eCollection 2019 Jun.

Authors

Francisco Jareño¹, Marta Tolentino², Carlos Cano^{1

3}

Affiliations

¹ Department of Economics and Finance, University of Castilla-La Mancha, Albacete, Spain.
² Department of Economics and Finance, University of Castilla-La Mancha, Ciudad Real, Spain.
³ Eurocaja Rural, Toledo, Spain.

Abstract

This paper estimates US industries' ability to transmit inflation shocks to the prices of their products and services (flow-through capability, FTC) and the stock duration (interest rate sensitivity) at the sector level. Then, considering the significant differences in ability among industries, we analyze the relationship between FTC and interest rate sensitivity using two alternative methodologies (in both cases). Finally, we find a significant negative relationship between FTC and stock duration, as suggested by previous literature. Thus, industries with high FTC, such as S7 (Finance and Real Estate), S9 (Manufacturing), S11 (Transportation and Warehousing) and S12 (Utilities), may be less sensitive (than expected) to changes in nominal interest rates. In contrast, sectors such as S4 (Retail Trade), S8 (Information) and S10 (Professional and Administrative Services) (with high IRS) may be more sensitive (than expected) to changes in nominal interest rates, indicating a weak ability to transmit inflation shocks to the prices of their products and services.

Keywords: Business economics; Economics; Finance; Financial economics; Flow-through capability; Inflation rate; Management; Sectoral analysis; Stock duration; Stock return.