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Impacts of short-term interest rates on stock returns and exchange rates: Empirical evidence from EAGLE countries

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  • Oguzhan Ozcelebi
  • Nurtac Yildirim

Abstract

In this study, we estimate Bayesian vector autoregression (BVAR) and time-varying structural VAR (TVP-VAR) models for Brazil, Indonesia, Mexico and Turkey to analyze the impacts of short-term interest rates on stock prices and exchange rates considering the relationships between these variables. BVAR and TVP-VAR models’ estimations indicate that monetary policy decisions of these countries lead to capital movements as well as capital movements may create a considerable amount of variation in exchange and stock markets both in the periods of economic stability and financial crisis. We also reveal that increases in interest rates intending to prevent capital outflows may lead to decrease in stock returns, which in turn may deteriorate the real economic activity in Indonesia, while changes in short-term interest rates in Brazil, Indonesia and Turkey cannot be used as a tool to stabilize the value of their home currencies against the USD. Our study highlights the importance of formulating an optimal monetary policy framework accompanied by macro-prudential polices, which help to reach inflation target and smooth the possible variations in exchange rates and stock prices during economic crisis conditions in Brazil, Indonesia, Mexico and Turkey.

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  • Oguzhan Ozcelebi & Nurtac Yildirim, 2017. "Impacts of short-term interest rates on stock returns and exchange rates: Empirical evidence from EAGLE countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 26(2), pages 228-255, February.
  • Handle: RePEc:taf:jitecd:v:26:y:2017:i:2:p:228-255
    DOI: 10.1080/09638199.2016.1232747
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    1. Román Ferrer & Syed Jawad Hussain Shahzad & Adrián Maizonada, 2019. "Nonlinear and extreme dependence between long-term sovereign bond yields and the stock market: A quantile-on-quantile analysis," Economics Bulletin, AccessEcon, vol. 39(2), pages 969-981.
    2. Toparlı, Elif Akay & Çatık, Abdurrahman Nazif & Balcılar, Mehmet, 2019. "The impact of oil prices on the stock returns in Turkey: A TVP-VAR approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 535(C).

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