Stock market and interest rate
Empirical evidence for Colombia 2008–2023
DOI:
https://doi.org/10.46661/rev.metodoscuant.econ.empresa.11879Keywords:
COLCAP, Time Series, EGARCH Model, cointegration, Granger Causality, Colombia, interest rateAbstract
One of the most widely analyzed relationships in both financial markets and academic literature-particularly over the past 25 years-is that between interest rates and stock prices, approached from various perspectives. This study empirically examines the relationship between the monetary policy interest rate and the Colombian stock market, using daily data for the period from January 2008 to June 2023. Several econometric techniques for financial time series are applied: cointegration tests between stock prices and the interest rate using different estimators; an ARIMAX-EGARCH model to capture the asymmetric conditional volatility of stock returns and its relationship with changes in the interest rate; and a VAR model to analyze Granger causality. The results provide evidence of a long-term equilibrium relationship between the COLCAP index and the interest rate; an asymmetric conditional volatility in the COLCAP also explained by the monetary policy rate; and a bidirectional causality between the two variables.
Downloads
References
Abdullah, D.A., & Hayworth, S.C. (1993). Macroeconometrics of Stock Price Fluctuations. Quarterly Journal of Business and Economics, 32, pp. 46-63. https://www.jstor.org/stable/40473075
Aghasi, S., Hejazi, S., Faradonbeh, M., Javanbakht, A & Faradonbeh, F. (2013). A study on the effect of interest rate on performance of stock exchange: A case study of Tehran Stock Exchange. Management Science Letters, 3(5), 1357-1362.https://doi.org/10.5267/j.msl.2013.04.015
Alam, M., & Uddin, G.S. (2009). Relationship between Interest Rate and Stock Price: Empirical Evidence from Developed and Developing Countries. International Journal of Business and Management, 4(3), 43-51. https://doi.org/10.5539/ijbm.v4n3p43
Al-Qenae, R., Li, C. & Wearing, B. (2002). The Information Content of Earnings on Stock Prices: The Kuwait Stock Exchange. Multinational Finance Journal, vol. 6(3-4), pages 197-221. https://doi.org/10.17578/6-3/4-3
Arango, L. E., González, A. & Posada, C. E. (2002): Returns and the interest rate: a non-linear relationship in the Bogota'stock market, Applied Financial Economics, 12:11, 835-842. https://doi.org/10.1080/09603100110094493
Arsad Z., Baharudin, N. & Rahman, R. (2021). Estimating dynamic relationship between stock price and macroeconomic variables using Kalman filter approach. AIP Conf. Proc. 18; 2423 (1): 070024.https://doi.org/10.1063/5.0075997
Banerjee, A., Lumsdaine, R. L., & Stock, J. H. (1992). Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence. Journal of Business & Economic Statistics, 10(3), 271-287. https://doi.org/10.2307/1391542
Becerra, O. R. & Melo Velandia, L. F. (2009). Transmisión de tasas de interés bajo el esquema de metas de inflación: evidencia para Colombia. Cuadernos de Economía, 46, 107-134.https://doi.org/10.4067/S0717-68212009000100005
Bernanke, B. S., Gertler, M., & Gilchrist, S. (1994). The Financial Accelerator and the Flight to Quality. Review of Economics and Statistics, 78, 1-15. https://doi.org/10.3386/w4789
Bernanke, B., & Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9 (4), 27-48. https://doi.org/10.3386/w5146
Bernanke, B., & Kuttner, K. (2005). What Explains the Stock Market's Reaction to Federal Reserve Policy? The Journal of Finance, 60(3), 1221-1257. https://doi.org/10.1111/j.1540-6261.2005.00760.x
Bjørnland, H. C., & Leitemo, K. (2013). Identifying the Interdependence between US Monetary Policy and the Stock Market. Journal of Monetary Economics, 56, 275-282.https://doi.org/10.1016/j.jmoneco.2008.12.001
Gomez-Gonzaleza, Jose Eduardo, González-Molanob, Eliana, Huertas-Campos, Carlos, Cristiano-Botiad, Deicy, & Chavarro-Sancheze, Ximena. (2016). Evaluación de la transmisión de la tasa de interés de referencia a las tasas de interés del sistema financiero Colombiano. Ecos de Economía, 20(42), 19-45. https://doi.org/10.17230/ecos.2016.42.2
Conrad, C. (2021). The Effects of Money Supply and Interest Rates on Stock Prices, Evidence from Two Behavioral Experiments. Applied Economics and Finance, 8(2), 33-41. https://doi.org/10.11114/aef.v8i2.5173
Credicorp Colombia (2012). ABC del inversionista. Cartilla #1. https://www.credicorpcapitalcolombia.com/uploads/userfiles/Cartilla%20ABC%20del%20Mercado%20de%20Valores.pdf
Cristiano-Botia, D., González-Molano, E., & Huertas-Campos, C. (2017). Evaluación de la transmisión de la tasa de interés de referencia a las tasas de interés del sistema financiero considerando las expectativas de los agentes. Borradores de Economía, 988.
https://doi.org/10.32468/be.988
Da Silva, T. G., Carvalho-Guillén, O. T., Noronha-Morcerf, G. A., & De Melo-Modenesi, A. (2022). Effects of Monetary Policy News on Financial Assets: evidence from Brazil on a bivariate VAR-GARCH model (2006-17). Emerging Markets Review, vol 52, 100916
https://doi.org/10.1016/j.ememar.2022.100916
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74 (366), 427-431.https://doi.org/10.1080/01621459.1979.10482531
Dickey, D. A., & Fuller, W. A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with Unit Root. Econometrica, 49(4), 1057-1072.https://doi.org/10.2307/1912517
Eldomiaty, T., Saeed, Y., Hammam, R. & AboulSoud, S. (2020). The associations between stock prices, inflation rates, interest rates are still persistent: Empirical evidence from stock duration model. Journal of Economics, Finance and Administrative Science, 25(49), 149-161. https://doi.org/10.1108/JEFAS-10-2018-0105
Elliott, G., Rothenberg, T.J. and Stock, J.H. (1996), Efficient Tests for an Autoregressive Unit Root, Econometrica, 64(4), 813-836.
https://doi.org/10.2307/2171846
Engle, R. & Granger, C. (1987). Co-Integration and Error Correction: Representation, Estimation and Testing, Econometrica, 55(2), 251-276.https://doi.org/10.2307/1913236
Flannery, M.J. & James, C.M., (1984), The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions, Journal of Finance, 39, 1141-l154. https://doi.org/10.1111/j.1540-6261.1984.tb03898.x
Gan, C., Lee, M., Yong, H.H.A., & Jun, Z. (2006). Macroeconomic Variables and Stock Market Interactions: New Zealand Evidence. Investment Management and Financial Innovations, 3, 47-53. https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/1439/imfi_en_2006_04_Gan.pdf
Granger, C. and Newbold, P. (1974). Spurious Regressions in Econometrics, Journal of Econoemtrics, 2, 111-120.https://doi.org/10.1016/0304-4076(74)90034-7
Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424-438. https://doi.org/10.2307/1912791
Hasan, T., Samarakoon, LP. and Hasan, S. (2000). Stock prices behaviour in a less developed market; evidence from Sri Lanka. Journal of Applied Business Research, 16(02), 15-23.https://doi.org/10.19030/jabr.v16i2.2033
Herwartz, H., Maxand, S., & Rohloff, H. (2022). The Link between Monetary Policy, Stock Prices, and House Prices-Evidence from a Statistical Identification Approach. International Journal of Central Banking, 18(5), 111-163.
Humpe, A., & Macmillan, P. (2007). Can Macroeconomic Variables Explain Long Term Stock Market Movements? A Comparison of the US and Japan. Centre for Dynamic Macroeconomic Analysis Working Paper Series, 07/20.https://doi.org/10.2139/ssrn.1026219
Iregui, A. M., & Melo B., L. (2009). La transmisión de la política monetaria sobre el consumo en presencia de restricciones de liquidez. Borradores de Economía, 547. https://www.banrep.gov.co/docum/ftp/borra547.pdf
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Econometric Dynamics and Control, 12(2-3), 231-254.
https://doi.org/10.1016/0165-1889(88)90041-3
Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59, 155-1580.https://doi.org/10.2307/2938278
Johansen, S. (1995) Likelihood-Based Inference in Cointegrated Vector Autoregressive Models. Oxford, Oxford Academic.
https://doi.org/10.1093/0198774508.001.0001
Johansen, S. and Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration - with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52: 169-210. https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x
Kolmogorov, A. (1933). Sulla determinazione empirica di una lgge di distribuzione. Inst. Ital. Attuari, Giorn, 4, 83-91
Kwasi-Sampene, A., Li, C., Cui, H., Pearl, A., Fredrick, O. A., Robert, B., & Lincoln Ayisi, A. (2021). The effects of interest rate on stock market; empirical evidence from the ghana stock exchange. International Journal of Economic and Business Review-Peer Reviewed Journal, 9(4), 27-36. https://doi.org/10.36713/epra6790
Liu, M. H., & Shrestha, K. M. (2008). Analysis of the long-term relationship between macroeconomic variables and the Chinese stock market using heteroscedastic cointegration. Managerial Finance, 34(11), 744-755.https://doi.org/10.1108/03074350810900479
Maya, C., & Torres, G. I. (2005) The Unification of the Colombian Stock Market: A Step Towards Efficiency-Empirical Evidence. Latin American Business Review, 5(4), 69-98. https://doi.org/10.1300/J140v05n04_04
Maysami, R.C., Howe, L.C., & Hamzah, M.A., (2004). Relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from Stock Exchange of Singapore's All-S Sector Indices. Journal Pengurusan, 24, 47-77.
https://doi.org/10.17576/pengurusan-2005-24-03
Nasseh, A. & Strauss, J., (2000). Stock Prices and Domestic and International Macroeconomic Activity: A Cointegration Approach. The Quarterly Review of Economics and Finance; 40(2), 229-245.https://doi.org/10.1016/S1062-9769(99)00054-X
Nelson, C. R., & Siegel, A. F. (1987). Parsimonious Modeling of Yield Curves. The Journal of Business, 60(4), 473-489. https://doi.org/10.1086/296409
Perera, P.R (2016). The Importance of Interest Rate in Determining Stock Returns of Banks Finance and Insurance Companies in Sri Lanka. International Journal of Management and Commerce Innovations. 3(2), 451-454.
Perron, P. (1989). The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Econometrica, 57, 1361-1401.
https://doi.org/10.2307/1913712
Perron, P. & Vogelsang, T. (1992a). Nonstationarity and Level Shifts with an Application to Purchasing Power Parity. Journal of Business & Economic Statistics, 10, 301-320.https://doi.org/10.2307/1391544
Perron, Pierre & Vogelsang, T. (1992b). Testing for a Unit Root in a Time Series with a Changing Mean: Corrections and Extensions. Journal of Business & Economic Statistics, 10, 467-470. https://doi.org/10.1080/07350015.1992.10509923
Phillips, P C B & Ouliaris, S. (1990). Asymptotic Properties of Residual Based Tests for Cointegration. Econometrica, Econometric Society, 58(1), 165-193.https://doi.org/10.2307/2938339
Phillips, P. & Hansen, B. (1990). Statistical Inference in Instrumental Variables Regression with I(1) Processes. Review of Economics Studies, 57, 99-125.https://doi.org/10.2307/2297545
Pilinkus, D. & Boguslauskas, V. (2009). The short-run relationship between stock market prices and macroeconomic variables in Lithuania: An application of the impulse response function. Engineering Economics, 5(65), 26-34.
Ratanapakorn, O. & Sharma, S.C., (2007). Dynamic Analysis between the US Stock Returns and the Macroeconomic Variables. Applied Financial Economics, 17, 369-377.https://doi.org/10.1080/09603100600638944
Ross, S. (1976). ''The Arbitrage Theory of Capital Asset Pricing'', Journal of Economic Theory, Vol. 13, No. 3, pp. 341-360.
https://doi.org/10.1016/0022-0531(76)90046-6
Saikkonen, P. (1992). Estimation and Testing of Cointegrated Systems by an Autoregressive Approximation, Econometric Theory, 8, 1-27.
https://doi.org/10.1017/S0266466600010720
Smirnov, N. (1948). Table for estimating the goodness of fit of empirical distributions. Ann. Math. Stat, 19 (2) 279 - 281, June, 1948.
https://doi.org/10.1214/aoms/1177730256
Stock, J. & Watson, M. (1993). A Simple Estimator of Cointegrating Vectors In Higher Order Integrated Systems, Econometrica, 61(4), 783-820. https://doi.org/10.2307/2951763
Uddin, M.G.S., & Alam, M.M. (2010). The Impacts of Interest Rate on Stock Market: Empirical Evidence from Dhaka Stock Exchange. South Asian Journal of Management Sciences, 4(1), 21-30. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2941287
Vogelsang, T. J., & Perron, P. (1998). Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time. International Economic Review, 39(4), 1073-1100. https://doi.org/10.2307/2527353
Zivot, Eric & Donald W. K. Andrews (1992). "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, 10, 251-270.https://doi.org/10.1080/07350015.1992.10509904
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Jacobo Campo Robledo, Carlos Fernando Parra Moreno
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Submission of manuscripts implies that the work described has not been published before (except in the form of an abstract or as part of thesis), that it is not under consideration for publication elsewhere and that, in case of acceptance, the authors agree to automatic transfer of the copyright to the Journal for its publication and dissemination. Authors retain the authors' right to use and share the article according to a personal or instutional use or scholarly sharing purposes; in addition, they retain patent, trademark and other intellectual property rights (including research data).
All the articles are published in the Journal under the Creative Commons license CC-BY-SA (Attribution-ShareAlike). It is allowed a commercial use of the work (always including the author attribution) and other derivative works, which must be released under the same license as the original work.
Up to Volume 21, this Journal has been licensing the articles under the Creative Commons license CC-BY-SA 3.0 ES. Starting from Volume 22, the Creative Commons license CC-BY-SA 4.0 is used.
