ABSTRACT
Using a dynamic panel GARCH model for Asian countries, we find that interest rates are significantly lower when stock market uncertainty is high. Evidence of a positive relationship between stock market uncertainty and interest rate volatility is also provided.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 ‘Buttonwood: Slaves of the market,’ The Economist, 13 February 2016.
2 Since shocks are different, the conditional variance across countries is not equal although the model imposes homogeneity. The unconditional variances are also not equal across countries as each variance has a country-specific intercept given by .
3 This is computed as the normalized quarterly average of squared monthly stock market returns.
4 Qualitatively speaking, our results are robust to a conditional measure of uncertainty based on the separate estimation of a panel GARCH model for monthly stock price returns.
5 We also attempted to capture possible asymmetries in Equation 2 using the Glosten–Jagannathan–Runkle model, but the asymmetric effect was insignificant.