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Dynamic linkages and Granger causality between short-term US corporate bond and stock markets

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  • Matiur Rahman
  • Muhammad Mustafa

Abstract

It is sought to investigate a possible long-run association and Granger causality between US stock and short-term corporate bond markets by applying the well-known cointegration and error-correction methodology. The unit root tests reveal that the rates of return from S&P 500 and short-term US corporate bond yields are non-stationary in levels. The ADF test finds them cointegrated at 1, 5 and 10% levels of significance. The estimated error-correction model confirms a long-run relationship between these two markets. The short-term US corporate bond market appears to Granger-cause the US stock market in the long run. Furthermore, there appears to be a two-way short-run Granger causality and reversible feedback between these two markets.

Suggested Citation

  • Matiur Rahman & Muhammad Mustafa, 1997. "Dynamic linkages and Granger causality between short-term US corporate bond and stock markets," Applied Economics Letters, Taylor & Francis Journals, vol. 4(2), pages 89-91.
    • Handle: RePEc:taf:apeclt:v:4:y:1997:i:2:p:89-91
    DOI: 10.1080/758526701
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    References listed on IDEAS

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    Cited by:

    1. Sebastien Valeyre, 2022. "Optimal trend following portfolios," Papers 2201.06635, arXiv.org.
    2. Jammazi, Rania & Ferrer, Román & Jareño, Francisco & Hammoudeh, Shawkat M., 2017. "Main driving factors of the interest rate-stock market Granger causality," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 260-280.
    3. Amaresh Das, 2005. "Do stock prices and interest rates possess a common trend?," Recherches économiques de Louvain, De Boeck Université, vol. 71(4), pages 383-390.
    4. Rudra P. Pradhan & Mak B. Arvin & Sara E. Bennett & Mahendhiran Nair & John H. Hall, 2016. "Bond Market Development, Economic Growth and Other Macroeconomic Determinants: Panel VAR Evidence," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(2), pages 175-201, June.
    5. Amaresh DAS, 2005. "Do stock prices and interest rates possess a common trend?," Discussion Papers (REL - Recherches Economiques de Louvain) 2005042, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    6. Chun, Rodney M., 2000. "Compensation vouchers and equity markets: Evidence from Hungary," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1155-1178, July.

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