Research On The Effect Of The Interest Rate Expectation On Stock Returns

The interest rate is one of the main intermediary variables of the macro-control monetary policy issued by the central bank, market participants will form the expectation about the future of the stock market movements of interest rate adjustments and regulate their investment behavior,finally, it will be reflected in the current stock market. As investors are difficult to completely grasp the direction and intensity of the interest rate adjustment, there is always existing bias between the real rate adjustment and the investors’ expectation. This bias is just of the unexpected part of the interest rate adjustments in the market. Theoretically, the interest rate adjustments expected is completely based on the past history information, only new information which are not expected by the investors are able to affect the stock market. Therefore, the research on the effect of the interest rate expectation on stock returns, no matter for policy makers or public investors has very important significance.On the impact of interest rate adjustments on the stock market, many foreign experts and scholars have introduced expected factors, and started to study the impact of interest rate unexpected for market though the social investigation or building the model, while the domestic researches are slightly less especially those that are about the effects of the interest rate expectation on stock returns. Therefore, this paper employs autoregressive moving average model to separate the interest rate expectation, focuses on analyzing the effect of the expected interest rate and the unexpected interest rate on stock returns respectively. This paper intends to use Markov-switching model to do some discuss and empirical analysis based on the monthly stock market and Inter Bank Offered Rate data from October 2006 to October 2015. We hope to get some significant and enlightening conclusions.The theoretical analysis of the article is starting by describing the interest rate transmission mechanism of the stock market, discussing the effect on stock returns from interest rate shocks with expected factor and credit constraints. Interest rate shocks have effects on stock returns mainly by influencing investment. Usually, people invest only when the capital marginal efficiency is beyond the interest rate. The expectation of the interest rate will make the investment behavior of the economic entities change and affect the stock returns. In addition, because of investors’ expectations and business credit constraints, the interest rate has a certain degree of asymmetric effects on stock returns.Empirical researches in this paper include two parts: one is using ARMA model to distinguish the expectation of the interest rate variation, roughly studying the effects of interest rate variation on stock returns; the other is that we use Markov-switching model to analyze whether the expected interest rate and the unexpected interest rate has asymmetric effects on stock returns. Specific empirical research results are as follows:First of all, the result shows that the impact response of stock returns on the unexpected interest rate adjustment shoes a significant negative relationship, and the impact response of stock returns on the expected interest rate is very small, only the new information unexpected can influence the stock market.Secondly, this paper divides the stock market by the Markov-switching model, and analyzes the effect of the expected interest rate and the unexpected interest rate on stock returns respectively under the background of different markets. The result shows that the interest rate policy have stronger effects in the bear market than in the bull market. In addition, the unexpected change in interest rate policy has a larger impact on stock returns than the expected change has in the bull market, which is opposite in the bear market.