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Journal article
Main driving factors of the interest rate-stock market Granger causality
International review of financial analysis, Vol.52, pp.260-280
Jul 2017
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
This paper investigates the causal relationship between changes in the 10-year Treasury bond yield and the S&P 500 stock return in the United Sates with emphasis on time variation, stress factors and smooth regime transition. First, the time-varying Granger causality test proposed by Lu et al. (2014) is applied. Then a two-regime multifactor smooth transition regression model with a single transition variable representing a wide range of macroeconomic and financial variables is estimated in order to identify the key explanatory factors governing the causal relationship. The results show a significant bidirectional causal relationship over most of the study period, mainly due to the strong simultaneous interactions between the bond interest rate and the stock returns, and the causal link has strengthened since the beginning of the U.S. sub-prime crisis in the summer of 2007. Moreover, the U.S. financial stress indices seem to play a key role in explaining the dynamics of the causal relationship between the long-term interest rates and the stock returns, especially during the recent global financial crisis.
•Granger causal relations between changes in 10-year Treasury bond yields and stock returns of the US are examined.•Driving factors of the interest rate-stock market Granger causality are studied.•A two-regime multifactor STR model with a set of explanatory (macro-financial) variables is used.•Significant bidirectional Granger causal links between changes in yields on 10-year Treasuries and stock returns are found.•The causal relations seem to have intensified since the beginning of the U.S. sub-prime crisis in summer 2007.•Granger causal relations are mainly influenced by the U.S. financial stress indices, the VIX and the default spread.
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Details
- Title
- Main driving factors of the interest rate-stock market Granger causality
- Creators
- Rania Jammazi - Manouba UniversityRomán Ferrer - University of ValenciaFrancisco Jareño - University of Castilla-La ManchaShawkat M. Hammoudeh - Drexel University
- Publication Details
- International review of financial analysis, Vol.52, pp.260-280
- Publisher
- Elsevier
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Identifiers
- 991019168082504721
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- Domestic collaboration
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- Business, Finance