The causal relationship between stock price and interest rates
Abstract
The relationship between the movements of interest rates and stock prices has been the
subject of much speculation and empirical investigation. This is understandable, given the
important role they play in the economic development of a country. The relationship between
the two is of interest not only to economic theorists but also to investors who have to grapple
with issues regarding asset allocation and market timing. This study examines the
relationship between stock prices and interest rates and attempt to determine if there’s any
causal link between the two. Interest rate is represented by the weighted average lending rate
of commercial banks in Kenya and stock prices are proxied by the NSE 20 share index.
Secondary data, in the form of weekly observations for the period January 2004 to December
2013 is utilized. Time series analysis and the Granger causality test is employed to examine
the relationship. The results indicate that there is no significant causal relationship between
interest rate and share price.
CHAPTER ONE
INTRODUCTION
1.1 Background
The relationship between the movements of interest rates and stock prices has been the
subject of much speculation and empirical investigation. The relationship between the two is
of interest not only to economic theorists but also to investors who have to grapple with
issues regarding asset allocation and market timing.
The fundamental principle for the relatio
Citation
Post Graduate Diploma In Actuarial Science,University of Nairobi, 2014Publisher
University of Nairobi