Interest rate changes and stock returns: A European multi-country study with wavelets

Ferrer, Román; Bolós, Vicente J.; Benítez, Rafael

doi:10.1016/j.iref.2016.03.001

Cited by 74 publications

(56 citation statements)

References 41 publications

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“…However, a positive relationship between both variables is also possible if interest rates and stock prices move in the same direction following changes in economic prospects (Ferrer et al, 2016). For example, interest rates and equity prices may increase simultaneously in response to an improvement in the economic outlook.…”

Section: Datamentioning

confidence: 99%

Risk transmission between Islamic and conventional stock markets: A return and volatility spillover analysis

Shahzad

Ferrer

Ballester

et al. 2017

International Review of Financial Analysis

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151

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Abstract. This paper contributes to the current debate on the empirical validity of the decoupling hypothesis of the Islamic stock market from its mainstream counterparts by examining return and volatility spillovers across the global Islamic stock market, three main conventional national stock markets (the US, the UK and Japan) and a number of influential macroeconomic and financial variables over the period from July 1996 to June 2016. To that end, the VAR-based spillover index approach based on the generalized VAR framework developed by Diebold and Yilmaz (2012) is applied. The empirical analysis shows strong interactions in return and volatility among the global Islamic stock market, the conventional stock markets and the set of major risk factors considered. This finding means that the Islamic equity universe does not constitute a viable alternative for investors who wish to hedge their investments against the vagaries of stock markets, but it is exposed to the same global factors and risks hitting the conventional financial system. Therefore, this evidence leads to the rejection of the decoupling hypothesis of the Islamic stock market from conventional stock markets, which has significant implications for faith-based investors and policy makers in terms of portfolio diversification, hedging strategies and contagion risk.Keywords: Islamic stock market, conventional stock markets, global risk factors, return and volatility spillovers, spillover index approach JEL Classification: C58, G01, G15

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Section: Datamentioning

confidence: 99%

Risk transmission between Islamic and conventional stock markets: A return and volatility spillover analysis

Shahzad

Ferrer

Ballester

et al. 2017

International Review of Financial Analysis

Self Cite

151

View full text Add to dashboard Cite

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“…According to Ferrer, Bolós and Benıtez (2014), interest rate influences the stock market in two main ways. First, any changes in interest rate will affect the discount rate used in most of the modern valuation techniques.…”

Section: Interest Ratementioning

confidence: 99%

Factors Affecting Kuala Lumpur Composite Index (KLCI) Stock Market Return in Malaysia

Murthy¹,

Anthony²,

Vighnesvaran³

2016

IJBM

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This paper studies the relationship between Kuala Lumpur Composite Index Stock Market Return with four macroeconomic determinants, namely interest rate, exchange rate, money supply and oil price from January 1997 to December 2015 on a monthly basis with a total of 228 observations. However, most of the studies are carried out in developed countries and large economic nations instead of in emerging markets such as Malaysia. Thus, this study aims to extend the existing studies to include the impact of several macroeconomics determinants namely interest rate, exchange rate, money supply and oil price on KLCI stock market return. This paper employed Multiple Linear Regression to examine the statistical relationship and to test the hypotheses. The data was analyzed using Statistical Package for Social Science, SPSS. For diagnostic checking, there is existence of autocorrelation problem which is typically found in time-series data. Results indicated that there is negative relationship between exchange rate and stock market return and positive relationship between money supply and stock market return. Interest rate and oil price are found to have insignificant relationship with stock market return.

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“…This finding is consistent with Ferrer et al . () who also document a higher degree of association between stocks and bonds in the frequency band from one to two years. The global power spectrum (GPS) graphs, which present the average coherence for a given frequency, demonstrate that most of the significance is found at the frequency bands of below 32‐days and the coherence has low power at these scales.…”

Section: Resultsmentioning

confidence: 92%

“…Investors with short‐term investment horizons just follow trends and their investment decisions are largely determined by psychological factors and market sentiment. On the contrary, long‐term investors closely follow macroeconomic indicators (Moya‐Martinez, 2015; Ferrer et al ., ). In this context, our results highlight the significance of investment period heterogeneity when assessing the stock‐bond dependence structure.…”

Section: Resultsmentioning

confidence: 97%

“…Ferrer et al . () examine the interdependence between changes in 10‐year government bond yields and stock returns for some selected European countries in the time‐frequency domain. Their empirical findings demonstrate that the UK equities display the strongest linkage with the bond market followed by Germany, France, the Netherlands and Spain while much weaker interdependence between bond yields and stock returns is reported for Portugal, Ireland and Greece.…”

Section: Introduction and Literature Reviewmentioning

confidence: 99%

See 1 more Smart Citation

Stock‐bond Co‐movements and Flight‐to‐quality in G7 Countries: A Time‐frequency Analysis

Bayracı

Demiralay

Gencer

2017

Bulletin of Econ Res

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This paper examines co-movement between stock returns and changes in 10-year government bond yields as well as flight-to-quality behaviour in G7 countries. We conduct the wavelet squared coherence analysis to explore the dynamics in both time and frequency domain. Our results provide evidence of positive co-movements, which vary over time and across investment horizon. The higher co-movement is found to be more concentrated in the lower frequency bands. We further analyse the dynamic nature of the scale-dependent wavelet correlations and find that the correlations are highly volatile and significantly increase across different time scales during the episodes of equity market turbulence. The increase in correlations reflects flights from stocks to safer bond investments as a result of dramatic changes in investor sentiment and risk aversion at times of market stress. equal to the present value of all projected cash flows discounted at the appropriate discount rate. 1 Interest rates generally affect stock prices via two main channels. First, interest rate changes directly influence the discount rate in standard stock valuation models. Second, variations in interest rates impact cost of financing and hence significantly change expectations about cash flows. In other words, the rising cost of borrowing decreases the expected future cash flow, causing stock price to fall. Therefore, movements in interest rates may have a negative influence on stock prices. In this regard, bond yield variations also affect tactical portfolio allocation strategies which are closely followed for an efficient rebalancing between risk and return in order to impede the catastrophic effects of unanticipated changes in economic expectations.As a result of financial market integration, crises are transmitted from one economy (or asset) to another easily, becoming an epidemic. 2 This situation makes international diversification inefficacious in the presence of contagion at times of economic turmoil. Consequently, financial market participants are forced to avail themselves of different asset classes for diversification benefits. The phenomenon called as 'flight-to-quality' enables investors to redesign their portfolios towards less risky assets at times of distress. More commonly, bonds are viewed as quality assets against stocks. Hartmann et al. (2004) suggest that 'flight-to-quality is about as frequent as simultaneous crashes of stock and bond markets'. One of the most comprehensive definitions of 'flight-to-quality' (FTQ) phenomenon comes from Baur and Lucey (2009). 3 They advocate that the co-movements between stock and bond returns decline during stock market plunges. Investors flee from stocks to bonds in order to compensate the losses incurred in the equity markets at times of adverse stock market conditions. By contrast, they attribute the 'flightfrom-quality' to the decreasing co-movements in bullish market episodes. In this case, investors shift their holdings from bonds to stocks to exploit the potential profits from the rising equ...

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Interest rate changes and stock returns: A European multi-country study with wavelets

Cited by 74 publications

References 41 publications

Risk transmission between Islamic and conventional stock markets: A return and volatility spillover analysis

Risk transmission between Islamic and conventional stock markets: A return and volatility spillover analysis

Factors Affecting Kuala Lumpur Composite Index (KLCI) Stock Market Return in Malaysia

Stock‐bond Co‐movements and Flight‐to‐quality in G7 Countries: A Time‐frequency Analysis

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