Stock prices, exchange rate and interest rate: evidence beyond symmetry

Abstract

Purpose

This paper aims to examine the dynamic interactions between monetary and financial variables in the Indian context.

Design/methodology/approach

In this paper, the authors have applied a recently developed asymmetric autoregressive distributed lag (ARDL) model by Shin et al. (2014), for detecting nonlinearities focusing on the long-run and short-run asymmetries among economic variables.

Findings

The results point toward the presence of asymmetric reaction of stock prices to changes in interest rate and exchange rate in full sample, as well as in pre-crisis. However, no asymmetry was found in the post-crisis period. The results further suggest that tight monetary policies appear to retard the stock prices, more than easy monetary policies that stimulate them.

Practical implications

The findings of the study can be helpful in understanding the policy transmission mechanism through asset price channel.

Originality/value

To the best of the authors’ knowledge, this is the first study that examines the interactions between monetary and financial variables in the Indian context in an asymmetric framework. The findings of this study are quite interesting and are different from several existing studies in the literature.

Citation

Ajaz, T., Nain, M.Z., Kamaiah, B. and Sharma, N.K. (2017), "Stock prices, exchange rate and interest rate: evidence beyond symmetry", Journal of Financial Economic Policy, Vol. 9 No. 1, pp. 2-19. https://doi.org/10.1108/JFEP-01-2016-0007