Q Literature Review

7/30/2019 Q Literature Review

1/30

Impact of Interest Rate on Capital Market Growth

Richard, Adekunle and Hammed examine the impact of interest rate on capital markets

growth and to tool shed some light on how other macroeconomic variables such as

inflation rate, exchange rate also manipulate capital markets growth. There is require to

apply prudent macroeconomic policy in order for a country to obtain maximum benefitsfrom Capital Market. In tandem with the Technical analysis theory of Stock prices and

also in consonance with the empirical works of Coleman and Tettey (2006); and

Ologunde et al. (2006), the most appropriate model tocarry out an empirical investigationon the relationship between stock market growth and interest rate. The data analysis is

done by using Empirical analyses of specified models, Adjustment Dickey-fuller (ADF)

test, Phillips-Perron (P-P) tests, Error Correction Model and Stationary test. This studybasically examines the contact of interest rate on capital market growth in Nigeria

between the years 1985-2007. The period chosen for this study encompass the phases of

the main reforms in the Nigeria Capital Market.


2/30

The determinants of economic growth in Pakistan: Does

stock market development play a major role?

Rahman and Salahuddin provides an empirical study of the link between economicgrowth and its determinants, with special focus on stock market development in Pakistan.

The variables they use are Market Capitalization, Financial Development, Financial

Instability, Inflation Rate, Foreign Direct Investment, Literacy Rate, Stock marketliquidity. Using data for the period from 1971 to 2006, They apply FMOLS and ARDL

bounds-testing for the long run relationship and ECM for the short run dynamics. Annual

data on all variables for the period from 1971 to 2006 were collected from WorldDevelopment Indicators (WDI, 2006) database World Bank, Economic Survey of

Pakistan (2006), Economic Survey of Pakistan (2007) and International Financial

Statistics (IFS, 2006). The findings suggest a positive relationship between efficient stockmarkets and economic growth, both in short run and long run. Financial volatility and

inflation have harmful effects while human capital, foreign direct investment and stockmarket liquidity have positive effects on growth.


3/30

Relationship between Interest Rate and Stock

Price: Empirical Evidence from Developed and

Developing Countries

Alam finds out that Stock exchange and interest rate are two critical factors of economic

growth of a country. The impact of interest rate on stock exchange provides important

implication for monitory policy, risk management practices, financial securities valuation

and government policy towards financial markets. The data - Schedule Banks Fixed (3-6) Mos. and Stock Exchange Index- is taken from International Financial Statistics

(IFS). As representative of interest rate data and Bank Deposit Rate. Base on economic

situation, geographic locations and data availability in IFS. The following tests are usedfor data analysis: Market efficiency test, Panel data analysis on interest rate & share

price, Panel data analysis on changes of interest rate & changes of share price, Country-

wise time series analysis on interest rate and share price and Country-wise time series

analysis. It is found that Interest Rate has optimistic relationship with Share price butchange of Interest Rate has pessimistic relationship with change of Share Price.


4/30

The impact of interest rate policy on stock market

bubbles And trading behavior

Fischbacher, U; Hens, T; Zeisberger, S (2011) investigates the effect of interest ratepolicy on stock market bubbles and trading actions in tentative asset markets. The

variables they chose are trial economics, investment behavior, liquidity, monetary policy,asset market bubbles. The purpose of this study is to find out the prospect of investing in

interest posture bonds to the traditional laboratory asset market aim. The data is collected

through questioners, which are as follows Does the interest rate policy diminish the

strength and the period of asset price bubbles?, Do increasing interest rates reduceliquidity in the stock market? If yes, does this have an outcome on the bubble? And Does

interest rate policy have an contact on trading volume and precariousness? Data

investigation is done by using Average trading prices, Liquidity in the stock market,Control treatment without reinvestment of interest income, one-sided Mann-Whitney-U

tests. We find a strong impact on investors' portfolio choice decisions as liquidity in thestock market is condensed at the same time as interest rates rise.


5/30

Stock Market, Interest Rate and Output

Chiarella, Semmler, Mittnik and Zhu (June,2002) create a model of stock market, interestrate and output relations which is a generalization of the well known 1981 model of

Blanchard. The variables of this study are Stock Market, Interset Rate and Output. Theyallow for defective substitutability between stocks and bonds in the asset market and for

lagged portfolio alteration. The response of agents to changes in the stock market isreliant on the position of the economy. The data is collected by financial statistics which

are compared with historical data and RBC models. Data analysis is done by using VAR

framework, stochastic growth models, RBC methodology, consumption based capitalasset pricing (CCAP) model. The results of the latter process propose the existence of

nonlinearities in the real stock market contact. We want to note that our approach could

be further developed to study the effects of shocks, for example, monetary policy orexchange rate shocks on the interest rate, stock price and output in the circumstance of

the more fully developed nonlinear dynamic macro models.


6/30

IMPACT OF INTEREST RATE AND

EXCHANGE RATE ON

THE STOCK MARKET INDEX IN MALAYSIA

THANG (2009) examines empirically the character of the impact of the exchange rate

and interest rate on Malaysia stock market index. The purpose of this study is to find out

that Stock market performance can act as the barometer of the economy as a whole. Allthe data is obtained from International Financial Statistics from the International

Monetary Fund (IMF) and Malaysian Stock Exchange. Prior to testing for co integration,

Augmented Dickey Fuller (ADF) unit root test is performed. All the variables in ourstudy are inactive at first distinction, that is I (1) variables. Johansen Juselius (JJ) co

integration test, Vector Error Correction Model (VECM) and Granger Causality test were

practical to search for the long run and short-run impacts correspondingly. The testresults conform to a prioriprospect. The interest rate and the exchange rate have negative

impact on the stock market index in the long run as well as the short run. The resultsgrant some constructive insights into the effects of interest rate and exchange rate on the

stock market index in Malaysia. Our conclusion can help the policy makers in judgmenton planning as well as investors in decision on portfolio investment.


7/30

The impact of interest rate liberalization on the

corporate financing strategies of quotedcompanies in Nigeria

Omole and Falokun (1999) analyzed empirically the linkages among interest rates and the

leverage ratios (debt-to-equity ratio and debt-to-capital ratio) of selected firms, their

investment, turnover and profits. The intention of study is to observe empirically thepattern and direction of persuade of interest rate liberalization on the corporate financing

strategies of elected quoted companies in Nigeria, and the implications this will have for

the efficiency of interest rate policies. Data is collected through a survey of business aswell as the quoted companies final accounts and balance sheets, both before and after

liberalization. The data analysis is done by using debt-equity ratio, Kth class is a linearfunction of leverage, optimal debt-equity ratio. They find that investment is mainlydetermined by the accessibility of savings and the level of output estimated. Investment

has been pretentious as a consequence. However, the effects have been varied. on the

whole, the direct and indirect impact of interest rate liberalization has been substantial.The main policy implication arise from our conclusion is that interest rate policy can be

used to influence both the corporate presentation of industries and the growth of the

capital market.


8/30

Do Stock Prices Impact Consumption and Interest

Rate in South Africa?

Aye (2012) investigates the survival of spillovers from stock prices onto consumptionand the interest rate for South Africa. The Variables are Interest Rate and Stock Price.The intention of study is to find out the contact of interest rate of stock prices of South

Africa. The data model covers the quarterly period of 1960:1 until 2011:04. A three-

variable TVP-VAR model is predictable, capturing the time-varying nature of the

macroeconomic dynamics in the South African economy between real consumption,nominal interest rate and real stock prices. Data analysis is done by means of TVP-VAR

model, Markov Chain Monte Carlo (MCMC). They discover that the impact of a real

stock price shocks on consumption is in general activist, with great and major effectsobserved at the one-quarter ahead horizon.


9/30

Inflation Rate and the Stock Market

This article discusses a critical source of the breakdown of share prices to increase during

a decade of generous inflation. Definitely, the share value per dollar of pretax earnings

really fell from 10.82 in 1967 to 6.65 in 1976. The variables are Inflation rate and StockMarket. This idea of this study is to point out that the inverse relation between higher

inflation and lower share prices during the past decade was not due to probability or to

other unrelated economic proceedings. On the contrary, an imperative unsympatheticeffect of increased inflation on share prices consequences from basic features of the

current U.S. tax laws, particularly historic cost depreciation and the taxation of nominal

capital gains. The data analysis is done by using Market Equilibrium Model of ShareValuation. They discover that the increase in the effective tax rate caused by inflation has

not been the only adverse influence on the level of share prices during the last decade.

The slowdown in productivity growth, the higher cost of energy, and the increased

international competition have all reduced pre tax profitability.


10/30

MONEY, INTEREST RATE, AND STOCK

PRICES: NEW EVIDENCE FROM

SINGAPORE AND THE UNITED STATES

Wong, Khan and Du inspect the long-term as well as short-term equilibrium contact

between the major stock indices and selected macroeconomic variables (such as

money supply and interest rate) of Singapore and the United States. The purpose

of study is to detain the short-run dynamics of the link between Interest Rate and

stock prices. The data is collected from Primark Datastream International Database.

The data are analyzed by means of cointegration and causality tests. The results

of Granger causality tests expose some systematic causal associations implying

that stock market routine might be a good gauge for Central Banks monetary

policy regulation.


11/30

LOW INTEREST RATES AND HIGH Stock

PRICES

Shiller (2007) investigates that there has been a general perception in the past few years

that long-term asset prices are normally high because monetary authorities haveeffectively kept long-term interest rates, which the market uses to discount cash flows,

low. This opinion is not accurate. Long-term interest rates have not been particularly low.

The purpose of study is to find out that what has changed to produce high asset pricesappears as a replacement to be changes in well-liked economic models that people

actually rely on when valuing assets. The data is collected from insignificant long-term

(roughly ten-year) interest rates for four countries and the Euro Area. Data is analysisthrough The Dynamic Gordon Model and Dividend Yields. They have seen here that the

large movements in stock prices and real assets prices in the 10 years or so do not line up

with movements in long-term interest rates over the same time period.


12/30

Positivist Analysis on Effect of Monetary Policy on

Stock Price Behaviors

Shaoping adopt modern computing technique, calculated the effect of macro economic

elements as exchange rate, savings reserve, interest rate and money supply to stock pricebased on monthly time series data from Jan. 2005 to Jun. 2007 of China. The purpose of

the study is to find out the relationship between monetary policies and stock market long-

term price behaviors has always been a hot spot in academic research in financialeconomics. Data is collected from exchange rate of RMB to USD, year-term savings

interest rate, savings reserve rate, money supply and data analysis is done by using Unit-

root Testing, Coordinating Testing, Error Correction Model, Granger Causality Testing.The findings of indicates that Exchange rate change has a distinct effect on stock price.


13/30

The Association between Changes in Interest

Rates, Earnings, and Equity Values

Nissim and Penman indicates that stock returns are negatively related to changes in

interest rates, but there has been little corroborate research on the information in interestrate changes about the basics that the stock market prices. The variables are Interest Rate,

Earnings and Equity. The purpose of this study is to determine the amount of empiricalresearch documents that stock returns are negatively related to changes in interest rates,

but there has been relatively little corroborating research on the relationship between

interest rates and the fundamentals that the stock market prices. Data analysis is done byPanel data regressions of earnings, Time-series regressions of mean. We find that

changes in interest rates are negatively and significantly related to residual earnings in the

following five years.


14/30


15/30

The Relationship between Exchange Rate and

Stock Prices during the Quantitative Easing

Policy in Japan

Kurihara experienced unparalleled recession and deflation for more than 10 years. The

Bank of Japan enforced quantitative monetary easing at a level never seen before. Thevariables are Exchange Rate and Stock Price. The purpose of this study is to control stock

prices for economic recovery. This paper investigates the relationship between

macroeconomic variables and stock prices. Data is collected from Japanese stock prices(J stock), U.S. stock prices (U stock), exchange rate (yen/U.S. dollar; EX). In the analysis

Unit root tests, OLS Test, Co integration Test. He finds that interest rates have not

impacted Japanese stock prices but exchange rates and U.S. stock prices have.

Furthermore, the Bank of Japans policy for overcome recession and deflation has been

effective


16/30

Market, Interest Rate and Exchange Rate Risk

Effects On Financial Stock Returns

Beirne, Caporale and Spagnolo examine the sensitivity of financial sector stock returns tomarket, interest rate, and exchange rate risk in three financial sectors (Banking, Financial

Services and Insurance) in 16 countries. The purpose is to investigate the sensitivity of

stock returns to both interest and exchange rate risk in a number of European countries.The data is collected from four variate GARCH-in-mean model is estimated for 16

countries. They are the following: Austria, Belgium, Denmark, France, Germany, Greece,

Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Sweden, Switzerland, the UnitedKingdom, and the United States.. Data is analysis through following tests: Tests of No

GARCH-in-mean Effect, Tests of No Causality in Variance Effect, Tests of No Causality

in Mean Effect. As for the three types of risk, these are found to play a role mainly in thefinancial services sector, but with no clear sign pattern. Finally, most cases of volatility

spillovers occur from market return to sect oral returns in the insurance and banking

sector in European economies, though there are also some instances of interest rate and

exchange rate spillovers, both in Europe and the US.


17/30

Predictability Power of Interest Rate and

Exchange Rate Volatility on Stock Market Return

and Volatility: Evidence from Bursa Malaysia

Kadir, Selamat, Masuga and Taudi examine the predictability power of exchange rates

and interest rates respective volatilities on stock market volatility and return using

monthly Kuala Lumpur Composite Index (KLCI) returns. The purpose of study is to findout the relationship between interest rate and exchange rate and KLCI returns. Data is

collected through monthly close of Kuala Lumpur Composite Index obtained from Yahoo

Finance, end of month exchange rates and 3 months. Data is analysis by usingAugmented Dickey Fuller (ADF) test, Multicollinearity, Auxiliary Variables and VIF.

The findings of the study documented that the changes in interest rates did have a

negative impact on KLCI. This is consistent with the research-conducted by [6], [8] andwith the interest rate theory which suggest that there is a negative link between stock

prices and interest rates. A lesser interest rates kills the drive to save hence funds will be

motivated to the stock market. A high interest rate usually has an contrary effect .


18/30

The relationships between stock market

capitalization rate and interest rate: Evidence

from Jordan

Khrawish, Siam and Jaradatexamines the effect of interest rates on the stock market

capitalization rate in Amman Stock Exchange (ASE) over the period 1999-2008. Thevariables are Stock market capitalization rate, prevailing interest rate, and Government

development stock rate. The purpose of study is to find out significant and positive

relationship between government prevailing interest rate and stock market capitalizationrate (S). The data is collected from the Jordanian Department of Statistics, UNCTAD

Handbook of Statistics, and data sources of the World Bank. The data is analysis by

using Multiple Linear Regression Model and Simple Regression Model. The study shows

that Government development stock rate exerts negative influence on stock marketcapitalization rate, also it finds a significant and negative relationship between

government prevailing interest rate and Government development stock rate


19/30

The Relationship between Interest Rate, Exchange

Rate and Stock Price:

Hamrita examines the multi-scale link between the interest rate, exchange rate and stock

price using a wavelet transform. The purpose of study is to resolve the link betweeninterest rate, exchange rate and stock price. The analysis was conduct using monthly datafor the interest rate of American Treasury securities at 3-month constant maturity

provided by the Federal Reserve and the exchange rate among USD and EURO. The

closing S&P500 index is used as the indication of the stock price fluctuation. Empiricalanalysis cover the period form January 1990 to December 2008 providing 228

observations in total. The data analysis is done by using wavelet variance, covariance,

correlation and cross-correlation. It was found that only at low frequencies (longer

horizons), we remark a significant link between exchange rate and stock index at thisperiod.


20/30

Impact of Short-Term Interest Rates on Stock

Prices: Evidence from Sri Lanka

Chutang and Kumara identify the impact of short-term interest rates which are measured

by 91 days, 182 days and 364 days. The variables are Short-term interest rates and Stockprices of Sri lanka. The purpose of study is to provide empirical evidence of stock marketsensitivity to interest rates and inflation in UK. The sources of data are treasury bills with

the maturity period 91 days (TB 91), 182 days (TB 182) and 364 days (TB 364) are taken

as the explanatory variables and All Share Price Index (ASPI) and Milanka Price Index(MPI) are considered as the respond variables. Monthly data from January 2002 to

December 2009 for each variable is gather from the Annual Reports available by CBSL

as the secondary data source. To analysis data Multiple regressions, Unit root test,

Autocorrelation, Multicollinearity and Causality test. Findings of this paper provide theliterature for probable researches to examine the impact of other macroeconomic

variables on stock prices of Sri Lanka.


21/30

Effects of interest rate, exchange rate and their

volatilities on stock prices: evidence from banking

industry of Pakistan

JAWAID and HAQ investigate the effect of exchange rate, interest rates, and their

volatilities on stock prices of banking industry of Pakistan. The variables are interest rate,

exchange rate and stock prices. The purpose of study is to find out the existence ofsignificant harmful long run link between exchange rate and short term interest rate with

stock prices. The data is collected from Long run determinant of stock prices. Data is

analysis by using Stationary test, Co integration test results, Causality analysis andSensitivity analysis. The result supports the view that exchange rate and interest rate can

be used as an pointer for investment decision making in banking sector stocks.


22/30

Identifying time variability in stock and interest

rate dependence

Stein, Islami and Lindemann finds the correlation between stock markets and interestrates has been discussed in many studies in the past, with differing results in terms of

strength and direction of the relationship. The purpose of this study is to find out the

interdependence between stock markets and interest rates. The data is obtain from theU.S. Department of the Treasury, and the US stock market is best represented by the

Standard and Poors 500 Composite Index (S&P 500). The data analysis is done by using

CCC GARCH Model and Rolling Correlations. They identify a strong and significant

time transition in the correlation between interest rates and the stock market.


23/30

The Relationship between Exchange Rates and

Stock Prices

Dimitrova investigates that in the period November 2003 to February 2004, there was an

unambiguous upward trend in the U.S. stock market. Over the same period, the U.S.

dollar kept depreciating against all major currencies. The variables are Exchange Rateand Stock Price. The purpose of study is to find out a link between the stock market andexchange rates that might explain fluctuations in market. They perform Durbin-Watson testsfor autocorrelation, Dickey-Fuller tests for non-stationarity, Durbin-Watson test, Granger

Causality Test. This study developed the hypothesis that there is a link between the foreignexchange and stock markets. He asserted this link is positive when stock prices are the lead

variable and likely negative when exchange rates are the lead variable.


24/30

The Interest Rates-Stock Prices Nexus in Highly

Volatile Markets: Evidence from Pakistan

Shah, Rehman, Kamal and Abbas study causal relationship of interest rate and stock

prices. The purpose of this study is out find out that a change in real interest rate wouldcause a change in stock prices in an opposite direction. The data is collected from the

monthly realization of six month Treasury bill rate and closing points of KSE 100 from

1996 to 2010. The data is analysis through Dickey Fuller Test, Co integration Rank TestVAR Granger Causality/Block Exogeneity Wald Tests. The test results revealed that

interest rates do Granger cause stock prices but stock prices do not Granger cause interest

rates. The study concluded that the interest rates lead stock market up to 3 months .


25/30


26/30

Dynamic Effects of Changes in Interest Rates and

Exchange Rates on the Stock Market Return in

Bangladesh

Banerjee and Adhikary Investigates the exchange rate reveals a short term net negative

feedback from the exchange rate to stock market. The purpose of study is to find out the

interactions between national stock markets and exchange rates through changes in

foreign investment. Both the interest rate and exchange rate data have been collectedfrom monthly issues of International Financial Statistics published by the International

Monetary Fund (IMF). The data is analysis by using ADF, PP and KPSS Tests. It shows

that the exchange rate and stock market are nearly independent.


27/30

THE LINK BETWEEN THE CASH RATE AND

MARKET INTEREST RATES

Lowe explores the relationship between the cash rate and interest rates set by financial

intermediaries and interest rates set in auction markets. The paper argues that whilebanks' average lending spreads did not widen in the early 1990s, the margin between

lending rates and the cash rate did increase. All interest rates are expressed in per cent per

annum. The data analysis is done by using Unit Root and Co-integration Tests. He findsthat for changes in the cash rate to have an effect on economic activity and inflation, the

changes must be passed through to market interest rates.


28/30

Studying the Relation between Currency Rate,

Interest Rate and Inflation Rate

Saeidi and Valian investigates the relation between inflation rate and the same interest

rates during 1991-2009 in Iran economy. The aim of this research is to study thefluctuation of currency & interest rates as well as the relation between currency rate,interest rate and inflation rate. Data analysis is done by using Amended Model and

Dickey Fuller test. According to the results, there is a reverse and negative relation

between interest rate and currency rate. So, increased interest rate will cause decreasedcurrency rate.


29/30

The Effects of Changes in Foreign Exchange Rates

On ISE-100 Index

Anlas explore the relationship between changes in foreign exchange rates (Euro/TL,

GBP/TL, JPY/TL, CHF/TL, USD/TL, CAD/TL, SA/TL). The purpose of study is todetermine that exchange rate is the price of one country's currency expressed in another

country's currency or not? The data used in the research, is obtained from the official web

sites of ISE and Central Bank of the Republic of Turkey. I use monthly numbers for theperiod of 1999:01-2011:11. The data analysis is based on Dickey Fuller Test. The results

indicate that changes in domestic U.S. Dollar and Canadian dollar are positively related

to changes in ISE 100 while fluctuations in domestic interest rates and Saudi Arabia

Riyal have a negative impact on the index.


30/30

Discount rate changes, stock market returns,

volatility, and trading volume

Chen, Mohan and Steiner investigated the effect of discount rate changes on stock marketreturns, volatility and trading volume. The purpose of study is to examine the impact on

stock market returns, volatility and trading volume of Federal Reserve discount rate

changes. They classify types of discount rate changes, in accordance with Cook and Hahn(1988), as technical changes or policy changes. When the Federal Reserve Board changes

the discount rate, it states the reason for its action in a press release. The data analysis is

based on Dow Jones Index. Their results also support the notion that unexpected changes

in the discount rates impact market returns irrespective of the Federal Reserve operatingprocedures.

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Q Literature Review