flow-through capability the spanish case - uclm.pdfVIP

Flow-through capability: The Spanish case Received (in revised form): 14th March, 2005 Francisco Jaren˜ o is an Associated Professor of Financial Economics and a PhD student at Universidad de Castilla-La Mancha (Albacete, Spain). He is currently writing his PhD thesis. His research interests focus on stock returns and inflation in sectorial analysis and, more specifically, on the repercussion of inflation or interest rates shocks on stock returns. Universidad de Castilla-La Mancha, Facultad de CC. Econo´ micas y Empresariales de Albacete, Plaza Universidad, 1, 02071 Albacete, Spain Tel: 34 967 599200; Fax: 34 967 599220; e-mail: Francisco.Jareno@uclm.es Abstract This paper analyses the repercussion of variations in interest rates on quoted stocks. First, it reviews the main models of interest risk assessment, whose basic tool is the stock duration, that is, the sensitivity of the stock price to movements in nominal interest rates. It also analyses the main criticism concerning these models. Secondly, it estimates the capability of Spanish companies to pass inflation changes on to product or services prices. Keywords: interest risk, stock duration, flow-through Introduction Thus, the paper is organised into three The main significance of this research is parts. The first part looks at the main that the repercussions of variations in stock interest risk assessment models. The interest rates on quoted stocks will second part revises previous literature on depend on the capability of firms to pass the Fisher effect, in order to check inflation changes on to product or whether the majority of nominal interest services prices. The aim of this research rate movements are caused by inflation is to develop a methodology to estimate