Relationship between Interest Rate and Stock Price: Empirical Evidence from Developed and Developing Countries

International Journal of Business and Management (ISSN 1833-3850), Vol. 4(3), pp. 43-51, 2009

13 Pages Posted: 27 Mar 2017

See all articles by Md. Mahmudul Alam

Md. Mahmudul Alam

Universiti Utara Malaysia

Gazi Uddin

Presidency University

Date Written: 2009

Abstract

Stock exchange and interest rate are two crucial factors of economic growth of a country. The impacts of interest rate on stock exchange provide important implications for monitory policy, risk management practices, financial securities valuation and government policy towards financial markets. This study seeks evidence supporting the existence of share market efficiency based on the monthly data from January 1988 to March 2003 and also shows empirical relationship between stock index and interest rate for fifteen developed and developing countries - Australia, Bangladesh, Canada, Chile, Colombia, Germany, Italy, Jamaica, Japan, Malaysia, Mexico, Philippine, S. Africa, Spain, and Venezuela. Stationarity of market return is tested and found none of this stock market follows random walk model, means not efficient in weak form. To investigate the reasons of market inefficiency, relationship between share price and interest rate, and changes of share price and changes of interest rate were determined through both time series and panel regressions. For all of the countries it is found that interest rate has significant negative relationship with share price and for six countries it is found that changes of interest rate has significant negative relationship with changes of share price. So, if the interest rate is considerably controlled for these countries, it will be the great benefit of these countries’ stock exchange through demand pull way of more investors in share market, and supply push way of more extensional investment of companies.

Keywords: Efficient Market Hypothesis, Random walk model, Market Return, Interest Rate, Investment, Panel study

Suggested Citation

Alam, Md. Mahmudul and Uddin, Gazi, Relationship between Interest Rate and Stock Price: Empirical Evidence from Developed and Developing Countries (2009). International Journal of Business and Management (ISSN 1833-3850), Vol. 4(3), pp. 43-51, 2009 . Available at SSRN: https://ssrn.com/abstract=2941281

Md. Mahmudul Alam (Contact Author)

Universiti Utara Malaysia ( email )

Sintok, Kedah
Malaysia

Gazi Uddin

Presidency University ( email )

86/1 College Street
Kolkata, West Bengal 700073
India

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