Stock market uncertainty and interest rate behaviour: a panel GARCH approach

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.

KEYWORDS:

• Monetary policy rules
• stock market uncertainty
• GARCH
• panel data

JEL CLASSIFICATION:

• C33
• E40
• E58

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 ${\varphi }_i$.

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.