The Multi-Scale Interaction Between Interest Rate, Exchange Rate and Stock Price

Abstract:     
This paper examines the multi-scale relationship between the interest rate, exchange rate and stock price using wavelet transform. In particular, we apply the maximum overlap discrete wavelet transform (MODWT) to the interest rate, exchange rate and stock price for US over the period 1990:1- 2008:12 and using the definitions of wavelet variance, wavelet correlation and cross-correlations analyze the association as well as the lead/lag relationship between these series at the different time scales. Our results show that the relationship between interest rate and exchange rate is not significantly different from zero at all scales. On the other hand, the relationship between interest rate returns and stock index returns is significantly different zero only at the highest scales. The exchange rate returns and stock index returns have a relationship bidirectional in this period at longer horizons.

Keywords: Wavelet analysis, Interest rate, Stock price, Wavelet cross-correlation, Granger causality

JEL Classifications: C02, C22

Working Paper Series