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The Effect of Interest Rate Adjustment on the Stock Price Index in China

Received: 7 November 2022     Accepted: 6 January 2023     Published: 10 January 2023
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Abstract

The interest rate is one of the main tools used to control monetary policy in China. Changes in interest rates will affect the return on capital and the financial situation of enterprises, which will in turn have an impact on the stock market. What effect will interest rate adjustments have on the stock market? Are fluctuations in the interest rates and the stock market correlated? At present, there is no consensus on the answers to these questions. This paper studies these problems. In order to study the effect of the interest rate adjustment on the stock price index, this paper first conducts literature review and analysis, and then uses unit root test, Johansen integration test, Granger causality test and error correction model. The factors studied are the one-year deposit rate and the closing price of the Shanghai Composite Index from 1991 to 2015. It can be seen that the long-term relationship between the interest rate and stock prices is a reverse relation - when interest rates change, the stock price is adjusted in reverse. Specifically, (1) there is a long term reverse relationship between the interest rate and the stock price index, (2) interest rates are the Granger cause of the stock price index, and the stock price index is not the Granger cause of interest rates, (3) the stock price index cannot adjust to the interest rate in a short time.

Published in International Journal of Economics, Finance and Management Sciences (Volume 11, Issue 1)
DOI 10.11648/j.ijefm.20231101.12
Page(s) 14-20
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2023. Published by Science Publishing Group

Keywords

Interest Rate, Stock Marke, Stock Price Index

References
[1] Fama, E. (1990). Stock Returns, Expected Returns, and Real Activity. The Journal of Finance, 45 (4), p. 1089.
[2] Bernanke, B. and Kuttner, K. (n.d.). What Explains the Stock Market's Reaction to Federal Reserve Policy? SSRN Electronic Journal.
[3] Hashemzadeh, N. and Taylor, P. (1988). Stock Prices, Money Supply, and Interest Rates: the Question of Causality. Applied Economics, 20 (12), pp. 1603-1611.
[4] Rahman, M. and Mustafa, M. (1997). Dynamic Linkages and Granger Causality between Short-term US Corporate Bond and Stock Markets. Applied Economics Letters, 4 (2), pp. 89-91.
[5] Durham, J. (n.d.). Does Monetary Policy Affect Stock Prices and Treasury Yields? An Error Correction and Simultaneous Equation Approach. SSRN Electronic Journal.
[6] Camilleri S J, Scicluna N, Bai Y. (2019) Do stock markets lead or lag macroeconomic variables? Evidence from select European countries. The North American Journal of Economics and Finance, (48), pp. 170-186.
[7] Yan, W., Jin, T. (2010). Price Overflow Effect and Volatility Overflow Effect between Interest Rate and Stock Prices. Finance and Trade Economics, (2), pp. 93-102.
[8] Liu, Y. (2014). Research on the Effect of Chinese Interest Rates on Stock Price. Published by Shandong University.
[9] Duan, J., Zeng, L. (2007). The Strategy of Monetary Policy Dealing with Stock Price Fluctuation. The Theory and Practice of Finance and Economics, (3), pp. 52-56.
[10] Wu, Q. (2002). An empirical study on the influence of interest rate change on stock index. Shanghai Tongji University, (5), pp. 11-23.
[11] Ma, J. (2016). A Study on the Effect of Interest Rate Adjustment on Stock Prices in China. Published by Capital University of Economics and Business.
[12] Van Binsbergen J H, Diamond W F, Grotteria M. (2022). Risk-free interest rates. Journal of Financial Economics, (1): 1-29.
[13] Gürkaynak R, Karasoy-Can H G, Lee S S. (2022). Stock market's assessment of monetary policy transmission: The cash flow effect. The Journal of Finance, (4), pp. 2375-2421.
[14] Maloney T, Moskowitz T J. (2021). Value and Interest Rates: Are Rates to Blame for Value’s Torments?] The Journal of Portfolio Management, (6), pp. 65-87.
[15] Bhuiyan E M, Chowdhury M. (2020) Macroeconomic variables and stock market indices: Asymmetric dynamics in the US and Canada. The Quarterly Review of Economics and Finance, (77), pp. 62-74.
Cite This Article
  • APA Style

    Haodong Chen, Ruiqi Sun, Ke Gao. (2023). The Effect of Interest Rate Adjustment on the Stock Price Index in China. International Journal of Economics, Finance and Management Sciences, 11(1), 14-20. https://doi.org/10.11648/j.ijefm.20231101.12

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    ACS Style

    Haodong Chen; Ruiqi Sun; Ke Gao. The Effect of Interest Rate Adjustment on the Stock Price Index in China. Int. J. Econ. Finance Manag. Sci. 2023, 11(1), 14-20. doi: 10.11648/j.ijefm.20231101.12

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    AMA Style

    Haodong Chen, Ruiqi Sun, Ke Gao. The Effect of Interest Rate Adjustment on the Stock Price Index in China. Int J Econ Finance Manag Sci. 2023;11(1):14-20. doi: 10.11648/j.ijefm.20231101.12

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  • @article{10.11648/j.ijefm.20231101.12,
      author = {Haodong Chen and Ruiqi Sun and Ke Gao},
      title = {The Effect of Interest Rate Adjustment on the Stock Price Index in China},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {11},
      number = {1},
      pages = {14-20},
      doi = {10.11648/j.ijefm.20231101.12},
      url = {https://doi.org/10.11648/j.ijefm.20231101.12},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20231101.12},
      abstract = {The interest rate is one of the main tools used to control monetary policy in China. Changes in interest rates will affect the return on capital and the financial situation of enterprises, which will in turn have an impact on the stock market. What effect will interest rate adjustments have on the stock market? Are fluctuations in the interest rates and the stock market correlated? At present, there is no consensus on the answers to these questions. This paper studies these problems. In order to study the effect of the interest rate adjustment on the stock price index, this paper first conducts literature review and analysis, and then uses unit root test, Johansen integration test, Granger causality test and error correction model. The factors studied are the one-year deposit rate and the closing price of the Shanghai Composite Index from 1991 to 2015. It can be seen that the long-term relationship between the interest rate and stock prices is a reverse relation - when interest rates change, the stock price is adjusted in reverse. Specifically, (1) there is a long term reverse relationship between the interest rate and the stock price index, (2) interest rates are the Granger cause of the stock price index, and the stock price index is not the Granger cause of interest rates, (3) the stock price index cannot adjust to the interest rate in a short time.},
     year = {2023}
    }
    

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  • TY  - JOUR
    T1  - The Effect of Interest Rate Adjustment on the Stock Price Index in China
    AU  - Haodong Chen
    AU  - Ruiqi Sun
    AU  - Ke Gao
    Y1  - 2023/01/10
    PY  - 2023
    N1  - https://doi.org/10.11648/j.ijefm.20231101.12
    DO  - 10.11648/j.ijefm.20231101.12
    T2  - International Journal of Economics, Finance and Management Sciences
    JF  - International Journal of Economics, Finance and Management Sciences
    JO  - International Journal of Economics, Finance and Management Sciences
    SP  - 14
    EP  - 20
    PB  - Science Publishing Group
    SN  - 2326-9561
    UR  - https://doi.org/10.11648/j.ijefm.20231101.12
    AB  - The interest rate is one of the main tools used to control monetary policy in China. Changes in interest rates will affect the return on capital and the financial situation of enterprises, which will in turn have an impact on the stock market. What effect will interest rate adjustments have on the stock market? Are fluctuations in the interest rates and the stock market correlated? At present, there is no consensus on the answers to these questions. This paper studies these problems. In order to study the effect of the interest rate adjustment on the stock price index, this paper first conducts literature review and analysis, and then uses unit root test, Johansen integration test, Granger causality test and error correction model. The factors studied are the one-year deposit rate and the closing price of the Shanghai Composite Index from 1991 to 2015. It can be seen that the long-term relationship between the interest rate and stock prices is a reverse relation - when interest rates change, the stock price is adjusted in reverse. Specifically, (1) there is a long term reverse relationship between the interest rate and the stock price index, (2) interest rates are the Granger cause of the stock price index, and the stock price index is not the Granger cause of interest rates, (3) the stock price index cannot adjust to the interest rate in a short time.
    VL  - 11
    IS  - 1
    ER  - 

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Author Information
  • Investment Banking Department of Soochow Securities Co., LTD., Beijing, China

  • The Center for Economic Research, Shandong University, Jinan, China

  • Guanghua School of Management, Peking University, Beijing, China

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