Abstract:
The paper investigates the effects of interest rates on stock market performance by using monthly time series data for the economy of Bangladesh over the period of 1991 to 2012. A wide range of econometric techniques havebeen employed to analyze the relationship between the interest rate and stock market return. The study reveals a stable and significant long run relationship between the variables. By employing Cointegration technique it isobserved that in the long run, a one percent increase in interest rate causes 13.20 % decrease in market index. The estimated error correction coefficient indicates that 0.12 percent deviation of stock returns are corrected in theshort run. Impulse response function of the study also affirms the negative relationship between the variables. The result of Variance decompositions suggests that about 99.57 % of the variation in stock market returns isattributable to its own shock which implies that stock market returns are largely independent of the other variables in the system. Finally, Granger causality analysis suggests the existence of a unidirectional causalityfrom interest rate to market index
Machine summary:
Muktadir-Al-Mukit Faculty of Business Administration, Eastern University, Dhaka, Bangladesh ABSTRACT: The paper investigates the effects of interest rates on stock market performance by using monthly time series data for the economy of Bangladesh over the period of 1991 to 2012.
This paper attempts to analyze the relationship of stock market index with interest rate volatility in Bangladesh between 1991 and 2012 using monthly time series data.
The study of Adam and Tweneboah (2008) and Coleman and Tettey (2008) for the country of Ghana; the study of Nikiforos (2006) for the economy of United States and the study of Liu and Shrestha (2008) for the economy of China show inverse relationship between stock return and interest rate.
Banerjee and Adhikarys (2009) attempted to determine the dynamic effects of changes in interest rates a on the stock market return in Bangladesh and the results from VAR models suggest independence between the variables.
The panel regression of Alam and Uddin’s (2009) relationship between log transformed variables is stated below: study for fifteen developed and developing countries including Bangladesh shows existence LYt 0 1LINT t of negative and significant relationship between Where, Y is the natural log of DSE General (DGEN) Index LINT is the natural log interest rate Where U is the one period lagged value of the residual and the error correction component of the model which measures the speed at which 0 and i are the parameters known as the the prior deviations from equilibrium are intercept and slope coefficient and is the classical random disturbance term.