Impact of the global crisis on the linkages between the interest rates and the stock prices in Romania

Stefanescu, Razvan and Dumitriu, Ramona (2010): Impact of the global crisis on the linkages between the interest rates and the stock prices in Romania. Published in: Proceedings of the International Conference on Economics and Administration, Bucharest, June 3 – 4, 2011 (15 May 2010): pp. 595-607.

Abstract

Very often the crisis induces changes in the linkages between the financial variables. This paper explores, through a Vector Autoregression model and Granger Causality tests, the impact of the global crisis on the relation between the Romanian stock prices and the interest rates. We found this relation was very weak before the crisis, when the Romanian stock market experienced an ascendant trend. Instead, it became quite significant during the crisis when the financial markets are very sensitive to the external stimuli and the monetary policy has to take into consideration the impact of interest rates on the stock prices.

• Item Type: MPRA Paper
• Language: English
• Keywords: Granger causality, Vector Autoregression, Romanian stock market, interest rates, global crisis
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

Bernanke, B. S. and Gertler, Mark. (2001) Should Central Banks Respond to Movements in Asset Prices?, American Economic Review 91(3), pp. 253-257.

Bernanke, B. S. and Gertler, M. (1999) Monetary Policy and Asset Volatility, Federal Reserve Bank of Kansas City Economic Review 84(4), pp. 17-52.

Bernanke, B. S. and Kuttner, K.N. (2005) What Explains the Stock Market’s Reaction to Federal Reserve Policy?, Journal of Finance 60(3), pp. 1221-57.

Bordo, M.D., Dueker, M. J. and Wheelock, D. C. (2007) Monetary Policy and Stock Market Booms and Busts in the 20th Century, Federal Reserve Bank of St. Louis, Research Division.

Blanchard, O. J. (1981) Output, the stock market, and interest rates, American Economic Review, 71, pp. 132–143.

Cecchetti, S.G.; Genberg, H.; Lipsky, J. and Wadhwani, S. (2000) Asset Prices and Central Bank Policy, Geneva Reports on the World Economy 2, International Center for Monetary and Banking Studies and Centre for Economic Policy Research.

Fama, E.F. (1970) Efficient capital markets: a review of theory and empirical work, Journal of Finance, 25, 383-417.

Flannery, M.J. and James, C.M. (1984) The Effect of Interest Rate Changes in The Common Stock Returns of Financial Institutions, Journal of Finance, Vol. 39, 1141-1153.

Goodfriend, M. (2003) Interest Rates Policy Should Not React Directly to Asset Prices, in William C. Hunter, George G. Kaufman, and Michael Pomerleano, eds., Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies. Cambridge, MA: The MIT Press, pp. 445-457.

Granger, C.W.J. (1969) Investigating Causal Relations by Econometric Models and Cross-Spectral Methods, Econometrica.

Hayford, M. D. and Malliaris, A.G. (2004) Monetary Policy and the U.S. Stock Market. Economic Inquiry, 42(3), pp. 387-401.

Kent, C., Lowe, P. (1997) Asset price bubbles and monetary policy, Research Discussion Paper 9707. Reserve Bank of Australia.

Kindleberger, C. P., and Robert Z. A. (2005) Manias, Panics and Crashes: A History of Financial Crises, Fifth Edition, Palgrave-MacMillan.

Lanne, M., Lütkepohl, H. and Saikkonen, P. (2001) Test procedures for unit roots in time series with level shifts at unknown time, Discussion paper, Humboldt-Universität Berlin.

Lütkepohl, H. (2007) Econometric Analysis with Vector Autoregressive Models, European University Institute, Working Papers, ECO 2007/11.

Rigobon, R. and Sack, B. (2003) Measuring the Reaction of Monetary Policy to the Stock Market, Quarterly Journal of Economics, 118(2), pp. 639-669.

Saikkonen, P. and Lütkepohl, H. (2002) Testing for a unit root in a time series with a level shift at unknown time, Econometric Theory 18:313-348.

Shiller, R. J. (2005) Irrational Exuberance, 2nd Edition, Princeton: Princeton University Press.

Schwartz, A. J. (1995) Why Financial Stability Depends on Price Stability, Economic Affairs 15(4), Autumn, pp. 21-25.

Titman, S. and Warga, A. (1989), Stock Returns As Predictors of Interest Rates and Inflation, Journal of Financial and Quantitative Analysis, Vol. 24.

Wicker, E. (2006) Stock Market Speculation and the Federal Reserve, Indiana University working paper.