The Impact of Interest Rate Changes on Stock Volatility Across Different Sectors

Abstract

Interest rates are one of the most important channels through which monetary policy affects financial markets, but their effect is unlikely to be uniform across sectors. Firms in technology, energy, financial services, real estate, consumer staples, and health care differ in their financing needs, duration of expected cash flows, cyclical exposure, and investor clientele. These differences suggest that a common change in the federal funds rate may create different patterns of stock price volatility across sector portfolios. This paper investigates the impact of interest rate changes on sector-level stock volatility in the United States from 2019 to 2024. The study combines monthly Federal Funds Effective Rate data with daily price histories for six Select Sector SPDR exchange-traded funds: XLE, XLF, XLK, XLP, XLRE, and XLV. Daily log returns are calculated from ETF closing prices and then aggregated into monthly realized volatility measures. The empirical analysis uses descriptive statistics, correlation analysis, and sector-by-sector multiple linear regressions in which monthly volatility is explained by the level of the federal funds rate, monthly changes in the rate, and lagged volatility. The results show that sector volatility is heterogeneous even under the same interest rate environment. Energy and technology display the highest average volatility, while consumer staples and real estate show lower average volatility in the sample. Regression results suggest that interest rate variables help explain sector volatility, although the estimated relationships have different magnitudes and levels of statistical significance across sectors. The paper contributes to the literature by connecting monetary policy transmission with sector-level risk and provides practical implications for investors who use sector allocation to manage exposure to changing interest rate conditions.