THE EFFECTS OF THE ANNOUNCEMENTS OF PRIME-LENDING RATE AND MORTGAGE RATE CHANGES ON RETURNS OF PROPERTY STOCKS

Abstract

The period spanning 1996 to mid 1999 saw numerous bank announcements regarding changes in the prime-lending rate (PLR) and mortgage rate (MR). This dissertation examines whether there is information content in these news, in particular the impact of such announcements on the returns of property stocks. We use the traditional event study methodology proposed by Peterson (1989) and the alternative event study technique, namely the "dummy variable procedure" suggested by Glascock and Karafiath (1995), to study how daily property stock prices are affected by announcements of movements in the PLR and MR. The evidence suggests that there is a negative relationship between changes in the PLR and MR and property stocks returns, with PLR changes exerting a greater impact on property stock returns. Information leakage is also evident, as our analysis indicates that investors reacted to the impending announcements even before they were publicly released. Our study of the impact of "good news" (PLR and MR decreases) and "bad news" (PLR and MR increases) on property stocks returns suggests that both good news and bad news affect returns, with the good news (PLR decreases only) having a much larger impact. This finding is a departure from those obtained by Bae and Karolyi (1994). The statistical results also indicate that while the effect of the increases of PLR on property stock returns is weak, the decreases of PLR have a strong effect on property stock returns. We detect minimal effect of MR movements, whether increases or decreases, on property stock returns.