Stock market indices and interest rates in the US and Europe: persistence and long-run linkages

Abstract

Purpose

This paper aims to analyse the persistence of the S&P500 and DAX 30 stock indices as well as of the Fed’s Effective Federal Funds rate and of the European Central Bank’s Marginal Lending Facility rate, and the long-run linkages between stock prices and interest rates in the USA and Europe, respectively.

Design/methodology/approach

The methodology is based on the concepts of fractional integration and cointegration.

Findings

Using monthly data from January 1999 to December 2022, the results can be summarised as follows. All series examined are non-stationary: stock prices are found to be I(1) while interest rates display orders of integration substantially above 1, which implies a rejection of the hypothesis of mean reversion in all cases examined.

Originality/value

This paper uses an appropriate econometric framework to obtain new, reliable empirical evidence. All four series are highly persistent, and mean reversion does not occur in any single case. Moreover, the fractional cointegration analysis suggests that stock prices and interest rates are not linked in the long run.

Citation

Caporale, G.M., Gil-Alana, L.A. and Melnicenco, E. (2024), "Stock market indices and interest rates in the US and Europe: persistence and long-run linkages", Studies in Economics and Finance, Vol. 41 No. 5, pp. 1044-1056. https://doi.org/10.1108/SEF-06-2023-0304