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Stock returns and interest rates around the World: A panel data approach

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  • Assefa, Tibebe A.
  • Esqueda, Omar A.
  • Mollick, André Varella

Abstract

We examine quarterly stock returns of 21 developed and 19 developing economies from 1999 to 2013. Over this period, mean quarterly stock returns of 1.188% in developed economies contrast to 4.220% in developing economies. Economic growth has been substantially lower and interest rates have fallen (risen) in developed (developing) economies. Using dynamic panels, we find statistically significant negative effects of interest rates on stock returns in the developed countries, consistent with the expected cash flow hypothesis. In the developing markets, however, the world market portfolio is the sole determinant of stock returns. The contrasting effect of interest rates change on stock returns can be partially attributed to differing monetary policies and to the more mature capital markets inherent in developed economies.

Suggested Citation

  • Assefa, Tibebe A. & Esqueda, Omar A. & Mollick, André Varella, 2017. "Stock returns and interest rates around the World: A panel data approach," Journal of Economics and Business, Elsevier, vol. 89(C), pages 20-35.
  • Handle: RePEc:eee:jebusi:v:89:y:2017:i:c:p:20-35
    DOI: 10.1016/j.jeconbus.2016.10.001
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    Keywords

    Dynamic panels; Emerging markets; Interest rates; Monetary policy; Stock returns;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F30 - International Economics - - International Finance - - - General

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