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An Empirical Study of the Relationship between Money Market Interest Rates and Stock Market Performance: Evidence from Zimbabwe (2009-2013)

Author

Listed:
  • Trust Kganyago

    (Department of Finance, National University of Science and Technology, PO Box AC 939, Bulawayo, Zimbabwe)

  • Victor Gumbo

    (Department of Finance, National University of Science and Technology, PO Box AC 939, Bulawayo, Zimbabwe)

Abstract

The research examines the long run relationship between money market interest rates and stock market returns in Zimbabwe from April 2009 to December 2013. The estimation model controls for money supply growth rate, inflation, volume of manufacturing index, crude oil price and political stability. All the variables were tested for unit root using augmented Dickey-Fuller test before Johansen cointegration tests. Based on vector error correlation Granger causality tests, findings show evidence of strong and statistically significant inverse causal relationship between money market interest and stock market returns. Findings also show existence of short run causality that runs from stock market returns to money market interest rates. This is believed to be caused by the passive nature of money market in Zimbabwe and non-functionality of Reserve Bank of Zimbabwe in controlling interest rates through monetary policy. There is therefore need to implement robust and pragmatic macroeconomic policies like the repo market to reactivate the money market.

Suggested Citation

  • Trust Kganyago & Victor Gumbo, 2015. "An Empirical Study of the Relationship between Money Market Interest Rates and Stock Market Performance: Evidence from Zimbabwe (2009-2013)," International Journal of Economics and Financial Issues, Econjournals, vol. 5(3), pages 638-646.
  • Handle: RePEc:eco:journ1:2015-03-02
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    References listed on IDEAS

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    1. Elton, Edwin J. & Gruber, Martin J., 1988. "A multi-index risk model of the Japanese stock market," Japan and the World Economy, Elsevier, vol. 1(1), pages 21-44, October.
    2. George Bittlingmayer, 1998. "Output, Stock Volatility, and Political Uncertainty in a Natural Experiment: Germany, 1880-1940," Journal of Finance, American Finance Association, vol. 53(6), pages 2243-2257, December.
    3. Chen, Carl R. & Mohan, Nancy J. & Steiner, Thomas L., 1999. "Discount rate changes, stock market returns, volatility, and trading volume: Evidence from intraday data and implications for market efficiency," Journal of Banking & Finance, Elsevier, vol. 23(6), pages 897-924, June.
    4. Basher, Syed A. & Sadorsky, Perry, 2006. "Oil price risk and emerging stock markets," Global Finance Journal, Elsevier, vol. 17(2), pages 224-251, December.
    5. Emmanuel Anoruo, 2011. "Testing for Linear and Nonlinear Causality between Crude Oil Price Changes and Stock Market Returns," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 4(3), pages 75-92, December.
    6. Berk, Istemi & Aydogan, Berna, 2012. "Crude Oil Price Shocks and Stock Returns: Evidence from Turkish Stock Market under Global Liquidity Conditions," EWI Working Papers 2012-15, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
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    1. repec:ibn:ijefaa:v:9:y:2017:i:8:p:40-50 is not listed on IDEAS

    More about this item

    Keywords

    Interest Rates; Stock Market; Ordinary Least Regression;

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other

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