A Study of Swedish Mortgage Interest Rates and Swedbank Stock Returns : Time-varying Mortgage Margins and Stock Returns

Sammanfattning: How banks set the mortgage interest rates and the sizes of the mortgage margins they obtain from making mortgage loans always attract attention from households, government authorities, politicians and market actors. This thesis studies the relationship between Swedish mortgage interest rates and mortgage lending institutions’ costs of obtaining funds, and how the gross margins of mortgage interest rates influence the banks stock returns. In general, banks’ mortgage margins are correlated with their funding costs, which are typically reflected in the yields of mortgage bonds (covered bonds), interbank rates (STIBOR) and the repo rate. How-ever the correlations change over time and sometimes the mortgage margins are relatively low and sometimes relatively high. Since mortgage loans play an important role in banks’ lending business, the related interest rate margins should influence banks’ profitability and therefore the performance of their stock. Everything else equal, higher margins should result in higher stock returns. I have collected and constructed a time-series data set based on Swedbank mortgage rates, Swedbank stock prices, yields on government bonds, yields on mortgage bonds, STIBOR interest rates, and repo rate. Both descriptive analysis and econometric models are applied to analyze the time-varying characteristics of the financial data. The thesis covers unconditional correlation (Pearson correlations), and conditional correlation through applying DCC-GARCH models. Besides, ARCH and GARCH models are employed to measure the ARCH and GARCH effects of the spread (premium) terms between interest rates. The results from descriptive analysis and econometric models present the tight relationships between the mortgage interest rates and the corresponding funding costs, and show the posi-tive but low correlations between mortgage margins and bank’s stock returns. The results also support the existence of time-vary volatilities (risk) of spread (premium) terms and quantify the growth of return for the certain increase in risk taking.