What is the impact of rising interest rates on stock markets?

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18th Jun 2020 Business Question Reference this

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Question

What is the impact of rising interest rates on stock markets?

Answer

Stock markets provide comprehensive information about the healthy or deteriorating state of a particular economy. An important measure of that state is rising or falling interest rates, which have been consistently used as a relevant indicator of stock markets’ performance. Exploring these parameters is significant, as stock markets play an essential role for the economic growth of countries (Huang et al., 2016). In line with the assumptions of finance theory, interest rates represent the measurement of time value of money, which is a primary determinant of stock prices. There has been sufficient evidence pertaining to share market efficiency based on the information retrieved from stock index and interest rates for different countries. As a result, it has been revealed that interest rates tends to have a substantial negative relationship with share price, which has further implications to the overall health of particular economies (Sensoy and Tabak, 2016). This aspect implies that interest rate should be adequately controlled in order to benefit the stock exchange parameters within economies. Thus, it has been concluded that rising interest rates, along with exchange rate and inflation, have substantial influence on the performance of stock markets. For instance, it can be expected that higher stock money actually decreases interest rate, implying low cost of capital that may lead to better stock market value over time (Balogun et al., 2016). Specific changes in a country’s fiscal policy tend to cause changes in stock markets due to the emergence of real interest rates and anticipated profits. Moreover, economic volatility can be properly measured in relation to output in interest rates, which has led to a higher level of predictability of stock returns (Sensoy and Tabak, 2016).

References

Balogun, W. Dahalan, J. Hassan, S. (2016). Long run impacts of interest rate liberalization on stock market development. Procedia-Social and Behavioral Sciences. 219(31) 126-133. Huang, W. Mollick, A. V. Nguyen, K. H. (2016). U.S. stock markets and the role of real interest rates. The Quarterly Review of Economics and Finance. 59(1) 231-242. Sensoy, A. Tabak, B. M. (2016). Dynamic efficiency of stock markets and exchange rates. International Review of Financial Analysis. 47(1) 353-371.

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