In England, Interest Rates And Securities Prices, The Relationship Between Comparative Study

The relationships between interest rates and stock prices are varied in different countries. Great Britain's Securities Exchange has a long history and enjoys high degree of internationalization, while China's Exchange just developed for a few years and has low marketization. After joining the WTO, China will face more fierce competition. Analysing the interrelationships of interest rates and stock prices in the two countries will be helpful to understand the gap between the two countries, thus be signified to the improvement on the development of China's financial system and stock market.Using the references of west relatively mature economics theories and econometrics methods, this study investigates the interrelationship between interest rates and stock prices in the UK and China from August 1993 to April 2005, with the objectives of not only understanding the short-run dynamics and the long-run relations between these two variables, but also comparing the common aspects and differences between China and the UK. Firstly, the study indicates the interrelationships between the two variables, where a positive one exists between short interest rates and stock prices, a negative one between long interest rates and stock prices. There are several factors influencing the relations, including the mature and high efficient stock market with suitable size; the liberalization and market-orientation of the interest rates; a certain degree openness of the stock market and the sound macroeconomic environment with the rational expectation of the securities' selection. Secondly, reviews the relative literatures to understand the present studies and to seek the should-improved parts. The study finds that the econometrics methods evolved from static model analysis to the difference of the variables and further to the error correction model and non-linear stochastic simulation model; the objects of the study change from one countries to several ones; the studies on the China manifest no interrelationships between variables at first and now a little bit long-term equilibrium interrelationships. Thirdly, by applying Johansen cointegration techniques, results from co-integration indicate that there is one cointegrating vectors among the variables. Further, the study finds that several long-term and short-term causalities exist in both countries. It is suggested that further research in this area is needed before solid conclusions can be made. Finally, several suggestions basing on the results and reason analysis of the differences were given.