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Co-movements of the Prime Rate, CD Rate, and the S&P Financial Stock Index

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  • Ewing, Bradley T
  • Payne, James E
  • Forbes, Shawn M

Abstract

We examine the relation among the prime lending rate, certificate of deposit rate, and the S&P Financial Stock Index using cointegration and error correction modeling techniques. We find that these three financial time series share a long-run cointegrating relation. Subsequent vector autoregressive error correction results imply that the movement of these stock prices toward eliminating disequilibrium is about 1 percent within the first month. Impulse response functions indicate that changes in the deposit rate have a larger effect on changes in the price index of financial service sector stocks than do changes in the lending rate.Winter 1998.

Suggested Citation

  • Ewing, Bradley T & Payne, James E & Forbes, Shawn M, 1998. "Co-movements of the Prime Rate, CD Rate, and the S&P Financial Stock Index," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(4), pages 469-482, Winter.
  • Handle: RePEc:bla:jfnres:v:21:y:1998:i:4:p:469-82
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    Cited by:

    1. Su, Chi Wei & Chang, Hsu Ling, 2010. "Asymmetric Adjustment in the Lending-Deposit Rate Spread: Evidence from Eastern European Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 165-175, July.
    2. Tsai, Chun-Li, 2011. "The reaction of stock returns to unexpected increases in the federal funds rate target," Journal of Economics and Business, Elsevier, vol. 63(2), pages 121-138.
    3. Bradley Ewing & Shawn Forbes & James Payne, 2003. "The effects of macroeconomic shocks on sector-specific returns," Applied Economics, Taylor & Francis Journals, vol. 35(2), pages 201-207.
    4. Hsu-Ling Chang & Chi-Wei Su, 2010. "The Lending-Deposit Rate Relationship in Eastern European Countries: Evidence from the Rank Test for Non-linear Cointegration," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(6), pages 534-544, December.
    5. Tsai, Chun-Li, 2011. "The reaction of stock returns to unexpected increases in the federal funds rate target," Journal of Economics and Business, Elsevier, vol. 63(2), pages 121-138, March.

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