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 benefits from 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 investigation on 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 study basically 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.

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 economic growth 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 market liquidity. 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 World Development 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 stock markets and economic growth, both in short run and long run. Financial volatility and inflation have harmful effects while human capital, foreign direct investment and stock market liquidity have positive effects on growth.

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 (36) 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 used for 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, Countrywise 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 but change of Interest Rate has pessimistic relationship with change of Share Price.

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 rate policy 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 reduce liquidity 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 the stock market is condensed at the same time as interest rates rise.

Stock Market, Interest Rate and Output

Chiarella, Semmler, Mittnik and Zhu (June,2002) create a model of stock market, interest rate 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. They allow 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 is reliant 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 capital asset 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 or exchange rate shocks on the interest rate, stock price and output in the circumstance of the more fully developed nonlinear dynamic macro models.

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. All the 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 our study 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 test results conform to a priori prospect. 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 results grant 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 judgment on planning as well as investors in decision on portfolio investment.

The impact of interest rate liberalization on the corporate financing strategies of quoted companies 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 the pattern 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 as well 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 linear function of leverage, optimal debt-equity ratio. They find that investment is mainly determined 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.

Do Stock Prices Impact Consumption and Interest Rate in South Africa?

Aye (2012) investigates the survival of spillovers from stock prices onto consumption and 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 threevariable 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 effects observed at the one-quarter ahead horizon.

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 Stock Market. 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 unsympathetic effect 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 Share Valuation. 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.

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.

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 have effectively 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 prices appears 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 analysis through 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.

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 price based 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 longterm price behaviors has always been a hot spot in academic research in financial economics. 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 Unitroot Testing, Coordinating Testing, Error Correction Model, Granger Causality Testing. The findings of indicates that Exchange rate change has a distinct effect on stock price.

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 interest rate 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 empirical research 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 by Panel 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.

Interest Rate Risk and Bank Common Stock Returns: Evidence from the Greek Banking
Drakos explores the result of changes in the long-term interest rate on the common stock returns of banks listed in the Athens Stock Exchange. A set of financial variables from the banks balance sheets was used including the following: Market Value, Total Debt, Equity, Working Capital, Market-to-Book Ratio and Total Assets.. The purpose of study is to provide evidence for significant sensitivity of bank stock returns to interest rate movements. The data is collected by daily closing of nine bank common stock prices listed in the Athens Stock Exchange (ASE) from 14/11/1997 to 16/11/2000 providing 785 observations for each stock. The banks included in the sample are (in alphabetical order): ALPHA BANK, ATTICA BANK, COMMERCIAL BANK OF GREECE, EGNATIA BANK, EUROBANK, GENERAL HELLENIC BANK, NATIONAL BANK OF GREECE, NIBID, PIREAUS BANK. In order to analysis data Single Equation framework, Autoregressive Conditional Heteroscedasticity (IGARCH) model, seemingly unrelated regressions' method. The findings suggested that although a number of variables were correlated with interest rate sensitivity coefficients, working capital was the statistically preferred determinant, finding which was compatible with the nominal contracting hypothesis.

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. The variables 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

Market, Interest Rate and Exchange Rate Risk Effects On Financial Stock Returns
Beirne, Caporale and Spagnolo examine the sensitivity of financial sector stock returns to market, 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 United Kingdom, 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 the financial 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.

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 find out 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 using Augmented 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] and with 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.

The relationships between stock market capitalization rate and interest rate: Evidence from Jordan
Khrawish, Siam and Jaradat examines the effect of interest rates on the stock market capitalization rate in Amman Stock Exchange (ASE) over the period 1999-2008. The variables 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 capitalization rate (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 market capitalization rate, also it finds a significant and negative relationship between government prevailing interest rate and Government development stock rate

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 between interest rate, exchange rate and stock price. The analysis was conduct using monthly data for 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. Empirical analysis 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 this period.

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 Stock prices of Sri lanka. The purpose of study is to provide empirical evidence of stock market sensitivity 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 the literature for probable researches to examine the impact of other macroeconomic variables on stock prices of Sri Lanka.

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 of significant 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 and Sensitivity 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.

Identifying time variability in stock and interest rate dependence

Stein, Islami and Lindemann finds the correlation between stock markets and interest rates 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 the U.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.

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 Rate and Stock Price. The purpose of study is to find out a link between the stock market and exchange rates that might explain fluctuations in market. They perform Durbin-Watson tests for 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 foreign exchange 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.

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 would cause 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 Test VAR 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.

The Multi-Scale Interaction between Interest Rate, Exchange Rate and Stock Price
Hamrita, Abdallah and Ammou (2009) examines the multi-scale relationship between the interest rate, exchange rate and stock price. The purpose of study is to analyze the association as well as the lead/lag relationship between these series at the different time scales. The analysis was conducted using monthly data for the interest rate of American Treasury securities at 3month constant maturity provided by the Federal Reserve and the exchange rate between USD and EURO. The testing of data is done by using Wavelet Analysis and Maximal Overlap DWT (MODWT). Their results show that the relationship between interest rate and exchange rate is not significantly different from zero at all scales.

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 collected from 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.

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 while banks' 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 finds that 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.

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 the fluctuation 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 decreased currency rate.

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 to determine 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 the period 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.

Discount rate changes, stock market returns, volatility, and trading volume
Chen, Mohan and Steiner investigated the effect of discount rate changes on stock market returns, 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 operating procedures.