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Asymmetric Reactions of China¡¯s Stock Market to Short-term Interest Rates

Author

Listed:
  • Fang Fang
  • Weijia Dong
  • Xin Lv

Abstract

This paper investigates how China¡¯s stock market reacts to short-term interest rates, as represented by the Shanghai Interbank Offered Rate (Shibor). We adopt the Markov Regime Switching model to divide China¡¯s stock market into Medium, Bull and Bear market; and then examine how Shibor influences market returns and risk in different market regimes. We find that short-term interest rates have a significant negative effect on stock returns in Medium and Bull market, but could not affect stock returns in Bear market. In addition, different maturities of Shibor have different effects on stock returns. Furthermore, we find that the short-term interest rates have a negative effect on market risk in Bull market, but a positive effect in Bear market. Our findings show that China¡¯s market is quite peculiar and distinctive from the U.S. market or other developed countries¡¯ markets in many ways.

Suggested Citation

  • Fang Fang & Weijia Dong & Xin Lv, 2016. "Asymmetric Reactions of China¡¯s Stock Market to Short-term Interest Rates," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(5), pages 260-270, May.
    • Handle: RePEc:ibn:ijefaa:v:8:y:2016:i:5:p:260-270
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    References listed on IDEAS

    as
    1. Basistha, Arabinda & Kurov, Alexander, 2008. "Macroeconomic cycles and the stock market's reaction to monetary policy," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2606-2616, December.
    2. Gospodinov, Nikolay & Jamali, Ibrahim, 2015. "The response of stock market volatility to futures-based measures of monetary policy shocks," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 42-54.
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    More about this item

    Keywords

    short-term interest rate; stock returns; market risk; Markov Regime Switching model; GJR-GARCH model;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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