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The Impact Of Interest Rate Volatility On Stock Market Development: Evidence From Emerging Markets

Author

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  • Massomeh Hajilee
  • Omar M. Al Nasser

    (University of Houston-Victoria, USA)

Abstract

Interest rate uncertainty has adverse effects on stock market performance. Despite the considerable studies on the relationship between interest rate and stock market return, the relationship between interest rate volatility and stock market development still is enigma. This paper investigates the effect of interest rate uncertainty on stock market development. We examine the long-run and short-run relationship between these variables using Pesaran et al (2001) bounds testing approach to cointegration and error-correction modeling for 12 emerging economies over the period 1980- 2011. This methodology has two main advantages over other cointegration methods which have made it unique: first there is no need to do pre-unit root resting, which is an essential requirement in other methods, and second, we are able to distinguish short -run effects from its long- run effect. Diagnostic statistics applied in this study indicate that our models are stable, well specified and normally distributed residual free of autocorrelation. The estimated results here show a significant short-run effect of interest rate uncertainty on stock market developing in all of 12 emerging economies under study. Furthermore, our results indicate that in 9 out of 12 countries the short-run effects have been seen in the long-run as well, and the cointegration relationship is confirmed in almost all of the models by either the F-test results or negative sign of error correction term. Also, the long run real income estimated elasticity is significantly positive in all countries (except for Brazil, Chile and Thailand) which would be a major long-run factor affecting stock market development in most of emerging economies in this study. Moreover, we found a mixed long- run effect of interest rate on stock market development. The results obtained in this paper suggest that emerging economies need to be cautious in implementing financial market and interest rate policies. A well-developed financial system improves capital formation and the efficiency of resource allocation, enhancing investment, and therefore economic growth. Interest rate uncertainty significantly affects stock market development. Therefore, a sound monetary policy creates a safer investment environment and stock market development. The role of stock market development towards achieving economic growth is crucial.

Suggested Citation

  • Massomeh Hajilee & Omar M. Al Nasser, 2017. "The Impact Of Interest Rate Volatility On Stock Market Development: Evidence From Emerging Markets," Journal of Developing Areas, Tennessee State University, College of Business, vol. 51(2), pages 301-313, April-Jun.
  • Handle: RePEc:jda:journl:vol.51:year:2017:issue2:pp:301-313
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    Citations

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    Cited by:

    1. Massomeh Hajilee & Farhang Niroomand & Linda A. Hayes, 2023. "The relationship between interest rate volatility and the shadow economy in OECD countries: An asymmetric analysis," Australian Economic Papers, Wiley Blackwell, vol. 62(3), pages 539-566, September.
    2. Nenavath Sreenu, 2024. "Exploring unbalanced impacts of exchange rate volatility on the shadow economy: new evidence from BRICS nations," Economic Change and Restructuring, Springer, vol. 57(4), pages 1-26, August.
    3. Uruakpa Chiagoziam Gospel PhD & Kenneth C Kama & Odionye Joseph C. PhD & Uzoma Kelechi P, 2023. "Insurance Penetration and Interest Rate Nexus in Nigeria; an Autoregressive Distributed Lag Approach," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(10), pages 790-800, October.

    More about this item

    Keywords

    Interest Rate Volatility; Stock Market Development; Bounds Testing; Emerging Economies;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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