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The associations between stock prices, inflation rates, interest rates are still persistent: Empirical evidence from stock duration model

Author

Listed:
  • Eldomiaty, Tarek

    (Misr International University)

  • Saeed, Yasmeen

    (Misr International University)

  • Hammam, Rasha

    (Misr International University)

  • AboulSoud, Salma

    (Arab Open University Egypt)

Abstract

Purpose – This paper aims to examine the effect of both inflation rate and interest rate on stock prices using quarterly data on non-financial firms listed in DJIA30 and NASDAQ100 for the period 1999-2016. The stock duration model is used to measure the sensitivity in variations in inflation rates and interest rates on stock prices. Design/methodology/approach – The authors use standard statistical tools that include Johansen cointegration test, linearity, normality tests, cointegration regression, Granger causality and vector error correction model. Findings – The results of panel Johansen cointegration analysis show that cointegration exists between the stock prices, the changes in stock prices due to inflation rates and the changes in stock prices due to real interest rates. The results of cointegration regression show that inflation rates are negatively associated with stock prices, the real interest rates and stock prices are positively associated, changes in real interest rates and inflation rates Granger cause significant changes in stock prices, significant speed of adjustment to long run equilibrium between observed stock prices and real interest rates and significant speed of adjustment to long run equilibrium between changes in stock prices due to real interest rates and changes in inflation rates.

Suggested Citation

  • Eldomiaty, Tarek & Saeed, Yasmeen & Hammam, Rasha & AboulSoud, Salma, 2020. "The associations between stock prices, inflation rates, interest rates are still persistent: Empirical evidence from stock duration model," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 25(49), pages 149-161.
    • Handle: RePEc:ris:joefas:0162
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    References listed on IDEAS

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    Cited by:

    1. Zwak-Cantoriu Maria-Cristina, 2023. "The Contagion of International Crises: Implications of Inflation and Investor Sentiment on Stock and Treasury bond Returns," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 17(1), pages 1818-1838, July.
    2. Ballestra, Luca Vincenzo & D’Innocenzo, Enzo & Guizzardi, Andrea, 2024. "A new bivariate approach for modeling the interaction between stock volatility and interest rate: An application to S&P500 returns and options," European Journal of Operational Research, Elsevier, vol. 314(3), pages 1185-1194.
    3. Koivisto, Tero, 2024. "Asset price shocks and inflation in the Finnish economy," BoF Economics Review 6/2024, Bank of Finland.

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    More about this item

    Keywords

    Stock; Rates; DJINA; NASDAQ; Cointegration; Causality; VECM; Inflation rates; Real interest rates; Stock duration model; Cointegration causality; Stock prices; Dow Jones;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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