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Nonlinear relationship between money market rate and stock market liquidity in China: A multifractal analysis

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  • Yihong Sun
  • Xuemei Yuan

Abstract

This paper employs the multifractal detrended cross-correlation analysis (MF-DCCA) model to estimate the nonlinear relationship between the money market rate and stock market liquidity in China from a multifractal perspective, leading to a better understanding of the complexity in the relationship between the interest rate and stock market liquidity. The empirical results show that the cross-correlations between the money market rate and stock market liquidity present antipersistence in the long run and that they tend to be positively persistent in the short run. The negative cross-correlations between the interest rate and stock market liquidity are more significant than the positive cross-correlations. Furthermore, the cross-correlations between the money market rate and stock market liquidity display multifractal characteristics, explaining the variations in the relationship between the interest rate and stock market liquidity at different time scales. In addition, the lower degree of multifractality in the cross-correlations between the money market rate and stock market liquidity confirms that it is effective for the interest rate to control stock market liquidity. The Chinese stock market liquidity is more sensitive to fluctuations in the money market rate in the short term and is inelastic in response to the money market rate in the long term. In particular, the positive cross-correlations between the money market rate and stock market liquidity in the short run become strong in periods of crises and emergencies. All the evidence proves that the interest rate policy is an emergency response rather than an effective response to mounting concerns regarding the economic impact of unexpected exogenous emergencies and that the interest rate cut policy will not be as effective as expected.

Suggested Citation

  • Yihong Sun & Xuemei Yuan, 2021. "Nonlinear relationship between money market rate and stock market liquidity in China: A multifractal analysis," PLOS ONE, Public Library of Science, vol. 16(4), pages 1-18, April.
    • Handle: RePEc:plo:pone00:0249852
    DOI: 10.1371/journal.pone.0249852
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    References listed on IDEAS

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    1. Herrenbrueck, Lucas, 2019. "Frictional asset markets and the liquidity channel of monetary policy," Journal of Economic Theory, Elsevier, vol. 181(C), pages 82-120.
    2. Varlik, Serdar & Berument, M. Hakan, 2017. "Multiple policy interest rates and economic performance in a multiple monetary-policy-tool environment," International Review of Economics & Finance, Elsevier, vol. 52(C), pages 107-126.
    3. Jiang, Lei, 2014. "Stock liquidity and the Taylor rule," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 202-214.
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