Long-run and short-run linkages between stock prices and interest rates in the G-7

Main driving factors of the interest rate-stock market Granger causality

“…Over the last two decades, a vast amount of literature has investigated the relationship between movements in interest rates and equity returns (Alaganar et al, 2003;Ballester et al, 2011;Bartram, 2002;Broome and Morley, 2000;Elyasiani and Mansur, 1998;Ferrando et al, 2017;Ferrer et al, 2010;Flannery and James, 1984;Jareño et al, 2016;Lynge and Zumwalt, 1980;Reilly et al, 2007;Sweeney and Warga, 1986, among others). Much of this research has focused on stock returns of banking firms because of the peculiar nature of the financial intermediation business of those firms, as a large part of their revenues and costs depend directly on interest rates.…”

“…The pioneering studies utilized linear OLS regression (Flannery and James, 1984;Sweeney and Warga, 1986). However, subsequent contributions have applied more sophisticated techniques, including the cointegration analysis (Broome and Morley, 2000;Chan et al, 1997), nonlinear models (Ballester et al, 2011;Bartram, 2002) or different types of GARCH (generalized autoregressive conditional heteroscedasticity) models (Dajcman, 2012;Elyasiani and Mansur, 1998;Kasman et al, 2011).…”

Nonlinear Bivariate Comovements of Asset Prices: Methodology, Tests and Applications

“…Some other methodologies that are worth mentioning are the ones able to detect the presence, or lack of common cycles among asset prices. Broome and Morley (2000) use a cointegration technique for testing the presence of long-run common trends among stock prices and the risk free interest rate and perform dependence analyses to investigate the presence and features of short-run common cycles among the same quantities. In Chen and Wun Lin (2004) linear and non-linear Granger causality tests are used to examine the dynamical dependence relationships between spot and future prices.…”

Nonlinear Bivariate Comovements of Asset Prices: Theory and Tests

“…Some other methodologies that are worth mentioning are the ones able to detect the presence, or lack of common cycles among asset prices. Broome and Morley (2000) use a cointegration technique for testing the presence of long-run common trends among stock prices and the risk free interest rate and perform dependence analyses to investigate the presence and features of short-run common cycles among the same quantities. In Chen and Wun (2004) linear and non−linear Granger causality based tests are used to examine the dynamical dependence relationships between spot and future prices.…”