Main driving factors of the interest rate-stock market Granger causality

Rania Jammazi, Román Ferrer, Francisco Jareño () and Shawkat M. Hammoudeh

International Review of Financial Analysis, 2017, vol. 52, issue C, 260-280

Abstract: This paper investigates the causal relationship between changes in the 10-year Treasury bond yield and the S&P 500 stock return in the United Sates with emphasis on time variation, stress factors and smooth regime transition. First, the time-varying Granger causality test proposed by Lu et al. (2014) is applied. Then a two-regime multifactor smooth transition regression model with a single transition variable representing a wide range of macroeconomic and financial variables is estimated in order to identify the key explanatory factors governing the causal relationship. The results show a significant bidirectional causal relationship over most of the study period, mainly due to the strong simultaneous interactions between the bond interest rate and the stock returns, and the causal link has strengthened since the beginning of the U.S. sub-prime crisis in the summer of 2007. Moreover, the U.S. financial stress indices seem to play a key role in explaining the dynamics of the causal relationship between the long-term interest rates and the stock returns, especially during the recent global financial crisis.

Keywords: Interest rates; Stock returns; Smooth transition regressions; Time-varying Granger causality; Financial stress indices (search for similar items in EconPapers)
JEL-codes: C22 E44 G12 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521917300790
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:52:y:2017:i:c:p:260-280

DOI: 10.1016/j.irfa.2017.07.008

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().