Asian Journal of Management

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Relationship between Interest Rates and Stock Price: Evidence from Sri Lanka


Affiliations
1 Annamalai University/Senior Lecturer, Dept of Finance and Accountancy, Vavuniya Campus, Sri Lanka
2 Dept of Commerce (DDE), Annamalai University, Annamalainagar, 608 002
     

   Subscribe/Renew Journal


The macroeconomic variables have a strong influence on stock market activities. Colombo Stock Exchange (CSE) Sri Lanka shows a rapid growth in recent years and All Share Price Index (ASPI) is the evidence for that. This study attempts to identify the relationship between interest rates, which are Repo rate, one - year maturity Treasury bill rate and Saving Bank's one - year maturity fixed deposit rates and ASPI of CSE with a monthly observation from January 2005 to October 2011. The Augmented Dickey - Fuller Unit Root test proves that there is no serial correlation among variables. The variables are I(0) and cointegration test proved that the variables have long - run relationship. The problem of heteroskedasticity is detected and the heteroskedasticity corrected (white method)Generalized Liner Regression (GLS) results suggest that interest rate variation 44% on ASPI and the F value is significant at 1% level. Granger Causality test identifies the Repo rate and Treasury bill has causality problem. Therefore, the study concludes that the interest rates have strong impact on stock price.

Keywords

Repo Rate, Treasury Bill Rate, Fixed Deposit Rate, ASPI, Sri Lanka
Subscription Login to verify subscription
User
Notifications
Font Size


  • Alam M.M and Uddin, M.G.S. (2009). Relationship Between Interest rate and Stock Price: Empirical Evidence from Develop and Developing Countries, International Journal of Business and Management, 4(3), 43 – 51.

  • Arango , L. E., Gonzalez, A and Posada, C. E. (2002). Returns and interest rate: A nonlinear relationship in the Bogota stock market. Applied Financial Economics, 12(11), 835 – 842.

  • Balli Martain Neil and Elliott (2009). The US Financial and Economic Crisis: Where does it Stand and Where do we go from here? http://www.brookings.edu/~/media/Files/rc/papers/2009/0615_economic_c risis_baily_elliott/0615_economic_crisis_baily_elliott.pdf Accessed on 05.12.2011

  • Banerjee Prashanta K., and Adhikary Bishnik (2007), Dynamic Effects of Interest Rate and Exchange Rate changes on Stock Market Return in Bangladesh. Pp 119-133 http://rcube. ritsumei.ac.jp/bitstream/10367/737/1/08- RJAPS24_Dynamic%20Effects%20of%20Changes%20in%20Interest%20 Rates%20and%20Exchange.pdf Accessed on 22.08.2011

  • Chutang Zhang and Emil Sudath Kumara (2010). Impact of Short – Term Interest Rates on Stock Prices: Evidence from Sri Lanka, Proceeding of 7th International Conference on Innovation and Management, 1089 – 1093.

  • Claessens, S., Dasgupta, S., and Glen J. (1995). Return Behavior in Emerging Stock Markets. The World Bank Economic Review, 9(1), 131 – 151.

  • Emmanuel E. Daferighe and Samuel O, Aje (2009). An Impact Analysis of Real Gross Domestic Product Inflation and Interest Rates on Stock Prices of Quoted Companies in Nigeria, International Research Journal of Finance and Economics,25, 53 – 63.

  • Fama E. (1965). Randon Walks in Stock Market Prices, Financial Analysts Journal 55 -59.

  • Fama, E .(1965). The Behaviour of Stock Market Prices. Journal of Business, 38, 34 – 105.

  • Gupta J.P., Chevalier, A., and Sayekt, F. (2000) The Causality between Interest Rate, Exchange Rate and Stock Price in Emerging market: The Case of the Jakarta Stock Exchange. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=251253 Accessed on 22.09.2010.

  • Hoguet George R. (2008). Inflation and Stock Prices, Retrieved from www.ssga.com/library/esps/Inflation_and_stock_price_George_Hoguet_8. 21.08rev3CCRI1221060800.pdf on 3/11/2009

  • Khababa, N. (1998). Bahavior of stock prices in the Saudi Arabian Financial Market: Empirical Research Findings. Journal of Financial management & Analysis, 11(1), 48 -55.

  • Khrawish, Siam and Jaradat (2010). The relationships between stock market capitalization rate and interest rate: Evidence from Jordan, Business and Economic Horizons 2(2), 60 -66.

  • Knight, R. F. and Affleck-Graves, J.F. (1983).The Efficient Market Hypothesis and a Change to LIFO: An Empirical Study on the JSE. Investment Analysts Journal.21, 21-33.

  • Knight, R. F., Affleck-Graves, J.F. and Hamman, W. D. (!985). The Effects of Inventory Valuation Methods on Share Prices: Some New Evidence from JSE. Investment Analysts Journal, 26, 45 – 47.

  • Labo Bento J. (2002). Interest Rate Surprises and Stock Prices. http://onlinelibrary.wiley.com/doi/10.1111/1540-6288.00005/abstract Accessed on 13.10.2011.

  • Lee, W. (1997). Market Timing and Short-term Interest rates. Journal of Portfolio Management, 23(3), 35 – 46.

  • Masha, I. (2002). New Perspective on Inflation in Nigeria, Central Bank of Nigeria (CBN), Economic and Financial Review, 38(2), 34 -42.

  • Niederhoffer, V. and Osborne, M.F.M. (1966). Market Marketing ans Reversal of Stock Exchange. Journal of American Statistical Association, 61, 897 – 916.

  • Poshakwale, S. (1996). Evidence on the weak form – efficiency and the day of the week effect in the Indian Stock Market. Finance India, 10(3), 605-616.

  • Samuelson, P. A. (1965). Proof that Properly Anticipated Prices Fluctuate Randomly. Industrial Management Review, 6, 41 – 49.

  • Shiller, R. J. (1989)Market Volatility, Massachusetts: M.I.T. Press.

  • Smirlock, M. and Yawitz, J. ((1985). Asset Returns, Discount rate changes, and market Efficiency, Journal of Finance, XL(4), 1141-1158.

  • Wong Wing-Kenug, Habibullah Khan and Jun Du, (2005). Money, Interest Rates and Stock Prices: New evidence from Singapore and United States, U21 Global Working Paper http://nt2.fas.nus.edu.sg/ecs/Pub/wp/wpo601.pdf. Accessed on 15.03.2010


Abstract Views: 841

PDF Views: 1




  • Relationship between Interest Rates and Stock Price: Evidence from Sri Lanka

Abstract Views: 841  |  PDF Views: 1

Authors

Koperunthevy Kalainathan
Annamalai University/Senior Lecturer, Dept of Finance and Accountancy, Vavuniya Campus, Sri Lanka
Vijayarani Kaliaperumal
Dept of Commerce (DDE), Annamalai University, Annamalainagar, 608 002

Abstract


The macroeconomic variables have a strong influence on stock market activities. Colombo Stock Exchange (CSE) Sri Lanka shows a rapid growth in recent years and All Share Price Index (ASPI) is the evidence for that. This study attempts to identify the relationship between interest rates, which are Repo rate, one - year maturity Treasury bill rate and Saving Bank's one - year maturity fixed deposit rates and ASPI of CSE with a monthly observation from January 2005 to October 2011. The Augmented Dickey - Fuller Unit Root test proves that there is no serial correlation among variables. The variables are I(0) and cointegration test proved that the variables have long - run relationship. The problem of heteroskedasticity is detected and the heteroskedasticity corrected (white method)Generalized Liner Regression (GLS) results suggest that interest rate variation 44% on ASPI and the F value is significant at 1% level. Granger Causality test identifies the Repo rate and Treasury bill has causality problem. Therefore, the study concludes that the interest rates have strong impact on stock price.

Keywords


Repo Rate, Treasury Bill Rate, Fixed Deposit Rate, ASPI, Sri Lanka

References