Investment Strategies in Response to Rising Interest Rates

The capital market has continued to grow in importance over recent decades. Spain still lags behind other EU and OECD countries in this respect, but despite this, the increase in trading volume since the turn of the millennium is undeniable, already exceeding the level of annual GDP itself.

Thus, companies, self-employed professionals and individuals have increased the proportion of their budgets allocated to investment in this market. In particular, many companies across all sectors (increasingly SMEs as well, since until relatively recently investment in shares was restricted to large companies and financial institutions) use the stock market as a short-term investment instrument to generate financial returns, but also as a hedging instrument to reduce their exposure in other financial markets.

In this respect, we provide unique knowledge that connects the academic sphere, which investors often want nothing to do with because of the complexity of mathematical models, their difficult implementation or their highly specialised scientific language, with the business and institutional spheres. We provide a theoretical and practical framework that can be directly applied by financial directors.

Therefore, analysing and communicating the results of our research on the impact of changes in interest rates on equity returns can be directly implemented in the investment portfolios of companies and institutions.

For years, academia has been researching how all kinds of abrupt changes in any sphere (political, social, economic, etc.) affect the proper functioning of capital markets. The objective has been twofold: to analyse their impact on returns and volatility. Over these decades, many rational models have been developed to measure the normal behaviour of both variables, and more recently, behavioural models have been introduced to quantify the part of investor behaviour that, one might say, is not entirely rational.

The development of financial analysis has been spectacular, to the point where it is now at the forefront of statistical and econometric development, sharing this distinction with disciplines such as physics. However, this disruptive growth has also distanced a discipline that should be entirely pragmatic from its counterparts: investors, companies and institutions.

For this reason, we do not claim to contribute anything new in the sense that there is already extensive research along the same lines as ours. Rather, what we provide is the foundation for transferring the complexity of the scientific financial world to the business world, seeking to restore the interest of investors and financial directors in academia.

We achieve this through a simple econometric event-study model and analysis of fundamental characteristics at company and sector level that can improve the performance of investment portfolios.

The methodology and econometric models have already been developed and validated. They can be applied immediately by any organisation that needs to rebalance its investment or treasury strategy.

• Financial Departments of Companies of Any Size.
• Financial Institutions and Family Offices.
• Fund Management Companies and Investment Advisers.
• Public Administrations with Surplus Funds or Reserve Funds.
• Self-Employed Professionals and Individuals with Diversified Investment Portfolios.

Pedro Luis Angosto Fernández – Department of Economic and Financial Studies