Study of Causality between the Base Interest Rate and the Market Return of OECD Countries
Abstract
The relation between macroeconomic indicators and the capital market is a major problem in the eco-nomic literature. Market return and the base interest rate are two of the main drivers of economic growth, and the global financial crisis has provided additional impetus for research into the relationship between monetary policy and asset prices globally. This study examines the existence of causality be-tween the base interest rate and the market return of the OECD 15 countries for the period 2001 to 2017. Proof of causality in the direction of the BIR (Base Interest Rate) - market return would allow more accurate capital market forecasting as well as the use of interest rate as an impact tool.
References
[1] R. Rigobon, B. Sack, „ ‘Measuring the reaction of monetary policy to the stock market.’,“ The Quarterly Journal of Economics, 118 , p. 639–669, 2001.
[2] Y. Kurihara, „ “The relationship between exchange rate and stock prices during the quantitative easing policy in Japan,”,“ International Journal of Business, Vol.11, No4, pp. 375-86, 2006.
[3] I. Chatziantoniou, D. Duffy, G. Filis, „Stock Market Response to Monetary and Fiscal Policy Shocks: Multi-Country Evidence,“ 2013.
[4] E.Iglesias, Interaction between Monetary policy and stock prices: A comparison between the Caribbean and the US*, pp. 3-4, 2011.
[5] J. Tobin, „ A general equilibrium approach to monetary theory.,“ Journal of Money, Credit and Banking , pp. 15-29, 1969.
[6] C. Jones, R. Lumsdaine, O. Lamont, „Macroeconomic news and bond market volatility,“ Journal of Financial Economics, 47(3), p. 315–337, 1998.
[7] B. Lobo, „ Asymmetric Effects of Interest Rate Changes on Stock Prices,“ Financial Review, 35(3), p. 125–144, 2000.
[8] A. Schrey, A. Hafdísarson, S. Wendt, „ Effect of interest rate changes on stocks: Is the Icelandic market efficient?,“ p. 41, 2017.
[9] A. Basistha, A. Kurov, „‘Macroeconomic cycles and the stock market’s reaction to monetary policy,“ Journal of Banking and Finance, 32, pp. 2606-2616, 2008.
[10] R.Sweeney, A. Warga, „The Pricing of Interest-Rate Risk: Evidence from the Stock Market,“ Journal of Finance, 41(2), p. 393–410, 1986.
[11] D. Nissim, S. Penman, „The Association between Changes in Interest Rates, Earnings, and Equity Values,“ Contemporary Accounting Research, 20(4), 2003.
[12] O. Blanchard, „ Macroeconomics, 7th edn,“ Pearson, Boston. , 2017.
[13] C. Zhou, „Stock market fluctuations and the term structure,“ Finance and Economics Discussion Series, 96/03, p. 2, 1996.
[14] O.Ologunde, D. Elumilade, T. Asaolu, „Stock market capitalization and interest rate in Nigeria: A Time Series Analysis.,“ International Research Journal of Finance and Economics, 4, p. 154–167, 2006.
[15] L. Arango, A. González, C.Posada, “Returns and interest rate: A nonlinear relationship in the Bogota stock market,”,“ Applied Financial Economics, Vol.12, No11, pp. 835-42, 2002.
[16] B.Bernanke, K. Kuttner, „ What Explains the Stock Market’s Reaction to Federal Reserve Policy?,“ Journal of Finance, 60(3), p. 1221–1257, 2005.
[17] Md. Mahmudul, G. Uddin, „The relationship between interest rate and stock price: Empirical evidence from developed and developing countries. Internationa,“ Journal Of Business And Management. 4(3), p. 43–51, 2009.
[18] Hammed. O, Richard. A, „Impact of Interest Rate on Capital Market Growth.,“ Universal General of Management and Social Science, 2(11), pp. 1-24, 2012.
[19] A. Büyükşalvarcı, „The effects of macroeconomics variables on stock returns: Evidence from Turkey.,“ European Journal on Social Science. 14(3), p. 404–416, 2010.
[20] F. Ajagbe, „Evaluation of Effect of Interest Rate on Capital Market Growth in Nigeria (1985-2009),“ Research on Humanities and Social Sciences, Vol.5, No.14, p. 4, 2015.
[21] C. Ioannidis, A. Kontonikas, „ The impact of monetary policy on stock prices.,“ Journal of Policy Modeling, 30(1), p. 33–53, 2008.
[22] H. Bjornland, K. Leitemo, „Identifying the interdependence between US monetary policy and the stock market.,“ Journal of Monetary Economics 56, pp. 275-282, 2009.
[23] D. Bredin, S. Hyde, D. Nitzsche, G. O'reilly, „UK stock returns and the impact of domestic monetary policy shocks.,“ Journal of Business Finance and Accounting 34, pp. 872-888, 2007.
[24] R. Ferrer, V. Bolós, R. Benítez,, „Interest rate changes and stock returns: A European multi-country study with wavelets.,“ International Review of Economics & Finance, 44 , p. 1–12, 2016.
[25] D. Bredin, S.Hyde, D.Nitzsche, G.O'Reilly, „ European monetary policy surprises: The aggregate and sectoral stock market response.,“ International Journal of Finance and Economics 14, pp. 156-171, 2009.
[26] S. Kabaivanov, M. Milev, V. Markovska, Application of Path Simulation Techniques in Derivative Pricing, Trakia Journal of Sciences, vol. 9(2), ISSN 1313-3551.
[27] https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?view=chart
[28] https://data.worldbank.org/indicator/FR.INR.RINR?view=chart
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
By submitting a paper for publishing the authors hereby comply with the following provisions: 1. The authors retain the copyrights and only give the journal the right for first publication while licensing the work under Creative Commons Attribution License, which grants permissions to others to share the contribution citing this journal as first publication of the text. 2. The authors may enter separate, additional contractual relations for non-exclusive distribution of the published version of the work in this journal (e.g. to upload it in an institutional depository, or to be published in a book), given that they cite the first publication in this journal. 3. The authors are allowed and are encouraged to publish their works online (e.g. to upload it in an institutional depository, personal websites, social networks, etc.) before, during, and after the submission of the paper here, because this may lead to productive exchange, as well as earlier and larger referencing of the published works (see The Effect of Open Access).
