In recent years, considerable attention has been focused on interest rate risk and its impact on financial institutions. There has been widespread disagreement over how best to measure the interest rate risk exposure of depository financial institutions and also disagreement over the question of whether this type of risk is included in the institution's overall market (systematic) risk.; The study develops an equity valuation model that explicitly incorporates an alternative method of specifying interest rate risk. The model is then empirically validated for a sample of commercial banks in each of three size categories in the 1980-1989 "post-deregulatory" period. The goal is to determine how an institution's interest rate risk is related to its systematic risk, and if this relationship varies among banks of different size.
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