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The Multi-Scale Interaction between Interest Rate, Exchange Rate and Stock Price

Author

Listed:
  • Hamrita, Mohamed Essaied
  • Ben Abdallah, Nidhal
  • Ben Ammou, Samir

Abstract

This paper examines the multi-scale relationship between the interest rate, exchange rate and stock price using wavelet transform. In particular, we apply the maximum overlap discrete wavelet transform (MODWT) to the interest rate, exchange rate and stock price for US over the period 1990:1- 2008:12 and using the definitions of wavelet variance, wavelet correlation and cross-correlations analyze the association as well as the lead/lag relationship between these series at the different time scales. Our results show that the relationship between interest rate and exchange rate is not significantly different from zero at all scales. On the other hand, the relationship between interest rate returns and stock index returns is significantly different zero only at the highest scales. The exchange rate returns and stock index returns have a relationship bidirectional in this period at longer horizons.

Suggested Citation

  • Hamrita, Mohamed Essaied & Ben Abdallah, Nidhal & Ben Ammou, Samir, 2009. "The Multi-Scale Interaction between Interest Rate, Exchange Rate and Stock Price," MPRA Paper 18424, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:18424
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    File URL: https://mpra.ub.uni-muenchen.de/18424/1/MPRA_paper_18424.pdf
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    References listed on IDEAS

    as
    1. Ramsey, James B. & Lampart, Camille, 1998. "Decomposition Of Economic Relationships By Timescale Using Wavelets," Macroeconomic Dynamics, Cambridge University Press, vol. 2(01), pages 49-71, March.
    2. Gallegati, Marco, 2008. "Wavelet analysis of stock returns and aggregate economic activity," Computational Statistics & Data Analysis, Elsevier, vol. 52(6), pages 3061-3074, February.
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    Cited by:

    1. Pooja Joshi & Arun Kumar Giri, 2015. "Fiscal Deficits and Stock Prices in India: Empirical Evidence," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 3(3), pages 1-18, August.
    2. Guangxi Cao, 2012. "Time-Varying Effects of Changes in the Interest Rate and the RMB Exchange Rate on the Stock Market of China: Evidence from the Long-Memory TVP-VAR Model," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 230-248, July.

    More about this item

    Keywords

    Wavelet analysis; Interest rate; Stock price; Wavelet cross-correlation; Granger causality.;

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

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