Asymmetric Reactions of China¡¯s Stock Market to Short-term Interest Rates

Fang Fang, Weijia Dong and Xin Lv

International Journal of Economics and Finance, 2016, vol. 8, issue 5, 260-270

Abstract: This paper investigates how China¡¯s stock market reacts to short-term interest rates, as represented by the Shanghai Interbank Offered Rate (Shibor). We adopt the Markov Regime Switching model to divide China¡¯s stock market into Medium, Bull and Bear market; and then examine how Shibor influences market returns and risk in different market regimes. We find that short-term interest rates have a significant negative effect on stock returns in Medium and Bull market, but could not affect stock returns in Bear market. In addition, different maturities of Shibor have different effects on stock returns. Furthermore, we find that the short-term interest rates have a negative effect on market risk in Bull market, but a positive effect in Bear market. Our findings show that China¡¯s market is quite peculiar and distinctive from the U.S. market or other developed countries¡¯ markets in many ways.

Keywords: short-term interest rate; stock returns; market risk; Markov Regime Switching model; GJR-GARCH model (search for similar items in EconPapers)
Date: 2016
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