Abbas Valadkhani, Barry O’Mahony and Hazem Marashdeh
The aim of this study is to adopt a multifactor model to investigate the dynamic impacts of changes in the Reserve Bank of Australia’s (RBA) cash rate on the equity returns of the…
Abstract
Purpose
The aim of this study is to adopt a multifactor model to investigate the dynamic impacts of changes in the Reserve Bank of Australia’s (RBA) cash rate on the equity returns of the largest Australian companies during the period from January 1998 to May 2024.
Design/methodology/approach
The general-to-specific modeling strategy is used to determine how equity returns respond to contemporaneous or lagged changes in market movements, oil prices and calendar anomalies. The estimated parsimonious models pass key diagnostic tests, revealing that changes in the cash rate influence most companies, albeit in different directions and with varying response times.
Findings
While most banks, mining and insurance stocks are heavily impacted by changes in the cash rate, health and oil and gas stocks are predominantly affected by systemic market movements and oil prices. Almost all (13 out of 15) stocks exhibit significant responses to changes in oil prices.
Practical implications
Understanding these differential effects can help investors optimize their portfolio rebalancing strategies, particularly during periods of anticipated changes in interest rates. This is especially timely as the RBA is expected to start cutting the cash rate in the foreseeable future.
Originality/value
This study provides new insights by examining how changes in cash rates and oil prices impact the stock returns of Australia’s largest companies. It offers investors practical strategies for adjusting their portfolios in response to fluctuations in interest rates, oil prices and calendar anomalies.