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Empirical Research on Interest Rate to Stock Market under Perspective of Economic Cycle

Author: LiuJingWang
Tutor: KongQingFeng
School: Shandong University
Course: Project Management
Keywords: Economic cycle Interest rate Stock market
CLC: F832.51;F224
Type: Master's thesis
Year: 2011
Downloads: 109
Quote: 0
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Abstract

In recent years, the rapid development of financial market has become an outstanding feature of world economy. Securities market in China has been still in the era of development and improvement, however, its strategic position in the development of China economy has been recognized. Nevertheless, the impact of interest rate fluctuations on the share price has drawn great attention.As a link between monetary policy and capital market, interest rate plays an important role in the process of economic operation, therefore, can we regulate the capital market in practice? Economic environment in China varies under different economic systems and interest rate changes according to market, so does it play a role in controlling the share price? This has a great guiding significance in formulating the relative laws and regulations in China.Based on the theoretical foundation of relationship between interest rate and share price at home and abroad, this paper empirically analyzes and discusses the relationship between interest rate and share price in the rising and falling cycle of economic development under the background of China, which can provide the theoretical references for formulating the monetary policy in China, by investigating the correlative relationship between interest rate fluctuation and stock market with the method of econometrics.According to the empirical analysis on the key influencing factors for domestic and overseas market trend in different economic cycles, it can be concluded as follows:(1) Because the level of domestic securities market development is limited, the effectiveness of market is still not remarkable.(2) Stock market in China has been in the process of gradually well-developed, improved and effective status, thus the coordination between market and economy has been increasingly improved; however, it still can be subject to the great influence of policy variable, which is almost inevitable.(3) In the period of rising, investors are relatively optimistic about enterprise profit and anticipated appreciation in assets value resulted from economic growth, while the adverse effect of deflation policy will be concealed by optimistic expectations; the psychological expectation of investors become pessimistic in the economic cycle of falling, thus they will tend to observe the policy adjustment tendency of management and this factor will be of a higher weight. This research conclusion can be a good reference to the anticipation of current market trend (economy shows a trend of recovery, and policy anticipation is relatively vague).(4) Interest rate in current period and delay period can both affect the stock yield. Therefore, it can be seen that lagged effect can have a great effect on the fluctuation of interest rate, and it is necessary to strengthen and improve the mechanism related to market transmission, so as to constantly increase the sensitiveness of stock market to external information in our country. Based on the empirical research on model and the development situation of economy and market currently in our country, this paper also puts forward some relevant policy suggestions in the aspects of market surveillance policy, monetary policy and reform in stock market of China in recent years.(1) For policy selection, it is suggested to start with two aspects including circulation market value growth and institutional investor increase with a focus on expanding the capacity of market unceasingly, to attract more excellent companies to be listed, and meanwhile introduce more value-based and long-term investors to enter the market, which can mitigate the market fluctuations and enhance the stabilization of market development.(2) Stock market in China has been significantly influenced by the fluctuations in interest rate. As stock market plays a more and more important role in economic activities, monetary policy makers should take maintenance of market stability and avoidance of drastic fluctuations in stock market into consideration, and gradually take them as the objectives of policy control.(3) For interest rate policy, the author considers that it is inappropriate to completely liberalize interest rate at present in China, and level of interest rate should be placed in the market environment. Nevertheless, the government does not really stand still and refuse to make progress, never liberalize the interest rate, and instead, the government can lift its control over interest rate step by step according to the constant development of situation. In the transition process of interest rate levels, it is necessary to carry out the transition step by step according to market environment and defined interest rate level based on the development needs of current economic situation in China from beginning to end.(4) Interest rate in current period can have a great impact on stock yield, which can also be influenced by the interest rate in delay period, thus the effectiveness of stock market in China needs to be further improved. Its policy revelation lies in that the most important means to promote the sound and stable development of market is to strengthen supervision and control, so as to encourage the "just, fair and open" operation of market as well as its efficient development in great order, under the background of increasingly expanding stock market size and predominance of multilevel capital market.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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