DYT3 measures changes in interest rates at the short-term end of the yield curve.
i] is the excess return on a stock portfolio i; EMKTSP is the excess return on the S&P 500 stock index (the market factor); DYT3 is the change in the three-month TB yield; TPREM is the return on U.
1986; Kane and Unal, 1988], the coefficients of DYT3 and TPREM are expected to be negative and positive, respectively, in the regressions.
Beginning-of-month CD and TB yields used to compute the monthly values of DYT3 and DCDTB are obtained from Salomon Brothers' Analytical Record of Yields and Yield Spreads .
5) For the subperiods, the DYT3 and TPREM coefficients indicate that the extra-market interest rate sensitivity of the BHC portfolio was not significant in the pre-October 1979 period, while it was during the post-October 1979 period.
In particular, for the 1969-79 period, the market risk (beta) is lower than average and the DYT3 and TPREM coefficients do not indicate any significant extra-market interest rate risk, while the significant DPREM and DCDTB coefficients suggest significant extra-market default risk.
The significant correlations between the first component and DYT3, TPREM, DPREM, and DCDTB are reflective of the significance of the coefficients of these interest rate variables for the BHC portfolio in the multifactor model analysis (see Table 1).
The second PC is, however, significantly correlated with DYT3, which suggests that it may be related to the influence of short-term interest rate changes.
The third PC in the 1969-79 subperiod is significantly correlated with DYT3, DPREM, and DCDTB but the correlations are opposite in sign to those observed for the 1969-89 period.