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1 205 6 Decomposton of Shock Effect of Spot Interest Rates and Expected Interest Rates n Money Market to Stock Returns-based on Several Intermedary Varables YIN Ha-yuan QIAO Xao-le F A Abstract Ths paper use the monthly data n January 2003 June 204 to analyze the shock effect of the volatlty of money market spot nterest rates and expected short-term and long-term nterest rate n dfferent market condtons on stock returns and decompose the shock effect. The result shows the spot nterest rates and short-term and long-term expected nterest rates have a sgnfcant mpact on the stock market return and nvestor sentment. But the shock effect of long-term expected nterest rate s weaker than that n the spot rate and the expected short-term nterest rate The shock effect of dfferent market envronment also shows the asymmetry the stock market returns and the nvestor sentment are more vulnerable nfluenced by the volatlty of money market spot nterest rates and expected nterest rates n the bear market. Further decomposton of the shock effect shows The sample stock returns whch are more senstve to nvestor sentment the market excess return default spread factor and term spread factor are more vulnerable shocked by the volatlty of spot nterest rates and expected nterest rates n money market. These results ndcate that the nfluences of the volatlty of nterest rates on the stock returns are acheved largely through the nfluence of nvestor sentment and the credt envronment. Key words Money market nterest rates Stock return rates Decomposton of shock effect Investor sentment Credt envronment FJY02 GK JM7367
2 Fredman RESSET Choudhry Pearce Roley % Ioannds Kontonka OECD Chen Basstha Kurov CSMI SZZZ SZCZ Campbell Shller Rtter Warr Inflaton Illuson 2009 SZCZ SZZZ CSMI Pearson CSMI SZCZ SZZZ CSMI Kuttner
3 T T 2 + f T T 2 T 2 - T = + 2 T2 T 2 2 f T T 2 = ( T2 T 2 - T T ) / + T T ( ( 2) T 2 - T ) 2 T T2 T T 2 f T T 2 T 2 - T ~ CSI f 2 CSIM Baker Wurgler Baker Wurgler DCEFt TURNt CCIt ΔDEF t ΔTERM t NIV IPO IPORt 4 / IAV MRF / MS CPI Pagan CSI Sossounov Chna Sentment Index 5 2 CSI 20% CSMI 5 CSI CSMI Petkova Hahn Lee Fama-French 2 48 Baker M and Wurgler J. Investor Sentment and the Cross-secton of Stock Returns J. Journal of Fnance CICSI
4 Y t = α + n = β Y t - + γ IBOM + γ 2 D t IBOM + γ 3 f 2t + γ 4 D t f 2t + γ 5 t + γ 6 D t t + θ CPI rt + θ 2 IAV t + ε t 3 Y t t D t = = 0 IBOM t f 2t t t γ γ 3 γ 5 γ 2 γ 4 γ 6 CPI rt IAV t ε t 3 n β Y t - = τ ADF CSMIr CSI ΔDEF ΔTERM IBOM f 2 IAV CPIr J - B P ADF n P C T K C T 0 C 0 C T 0 C T 0 C 0 0 ADF C T K ADF ADF D t CSMIr t 3 D t 49
5 205 6 EGARCH CSMIr t γ + γ EGARCH f 2 γ 3 γ 4 5% 0% ARCH-LM Obs * R- squared EGARCH γ 3 γ ( 3 + γ ) ARCH f 2 % % 3. 2% 3 γ γ 2 5% γ 5 0% γ 6 γ γ % 8. 07% 2. 9% 2 IBOM f 2 CPI r IAV R 2 α γ γ 2 γ 3 γ 4 γ 5 γ 6 θ θ 2 CSMIr t ** ** ** * * *** ** * % 5% 0% IBOM γ γ + γ ( CSI ) t % 0% 3 EGARCH 3 EGARCH CSI t CSI t - f 2 γ 3 γ 4 CSI t - 5% 0% γ 3 ( γ 3 + γ ) 4 ARCH-LM Obs* R-squared f EGARCH 2. 4 ARCH. 8 3 γ 5 γ 6 % 3 IBOM f 2 CPI r IAV R 2 α β γ γ 2 γ 3 γ 4 γ 5 γ 6 θ θ 2 CSI t * *** ** * * **
6 205 6 γ = 0. 8 > γ + γ 2 = IBOM IBOM f % IBOM f % ( f ) 2 [ γ 3 = 0. 0 > ( γ 3 + γ 4 = 0. 0 ) ] ( f ) IBOM f 2 ( IBOM) f ( ) Klbanoff Peress IBOM % ( ΔDEF ) t ( ΔTERM ) t 3 EGARCH 4 ARCH-LM Obs* R-squared EGARCH ARCH A 38 PT 4 ST 397 ( IBOM) 5% 2 Doms&Morn 2004 Petkova 2006 Greenspan Put CSMI CSI 5
7 IBOM f 2 CPI r IAV R 2 α γ γ 2 γ 3 γ 4 γ 5 γ 6 θ θ 2 ΔDEF t ** ** ** ** * ΔTERM t 2. 5 *** *** ** *** β mkt β def 3. R t = α + β mkt CSMIr t + β def ΔDEF t + β term ΔTERM t + β sent CSI t + ε 4 CSMIr t CSMI 2. CSI t ΔDEF t ΔTERM t β mkt β def β term 3 β sent τ R t = α + γ IBOM t + γ 2 D t IBOM t + γ 3 f 2t + γ 4 D t f 2t + γ 5 t + γ 6 D t t + θ CPI rt + θ 2 IAV t + ε t 5 β term β sent β mkt β def β term β sent IBOM IBOM f 2 γ γ 3 γ ( 5 γ + γ ) ( 2 γ 3 + γ ) ( 4 γ 5 + γ ) γ + γ j 5 γ f 2 52 GICS
8 205 6 β mkt β def γ = α 0 + α β mkt + α 2 β def + α 3 β term + α 4 β sent + α sectors D sectors + ε 6 sectors β term γ γ γ 3 γ 5 γ ( + γ ) 2 γ ( 3 + γ ) 4 γ ( 5 + γ ) 6- ~ β sent β α 0 α α 2 α 3 α ( γ ) ** 0. 7 *** *** *** ( γ ) ** *** ** *** ( γ ) ** ( γ + γ ) *** *** ( γ 3 + γ ) ** ** ( γ 5 + γ ) α 2 α β sent % 6-3 α
9 Fredman M. Money and the Stock Market J. Journal of Poltcal Economy Choudhry T. Real Stock Prces and the Long-run Money Demand Functon Evdence from Canada and the USA J. Journal of Internatonal and Fnance Pearce D. K. Roley V. V. Stock Prces and Economc News J. Journal of Busness Ioannds C Kontonkas A. The Impact of Monetary Polcy on Stock Prces J. Journal of Polcy Modelng J J Chen S. S. Does Monetary Polcy Have Asymmetrc Effects on Stock Returns J. Journal of Money Credt and Bankng Basstha A. Kurov A. Macroeconomc Cycles and the Stock Market's Reacton to Monetary Polcy J. Journal of Bankng and Fnance Campbell J. Y. and R J. Shller. The Dvdend-Prce Raton and Expectatons of Future Dvdend and Dscount Factors J. Revew of Fnancal Studes Rtter Jay R and Rchard S. Warr. The Declne of Inflaton and the Bull Market of J. Journal of Fnancal and Quanttatve Analyss J J Knleger Joel and Keuneth Kuttner. The Fed Funds Futures Rate as a Predetor of Federal Reserve Poley J. Joumal of Futures Markets Baker M. Wurgler J. Investor Sentment and the Cross-secton of Stock Returns J. Journal of Fnance Petkova R. Do Fama-french Factors Proxy for Innovatons n Predctve Varables J. Journal of Fnance Hahn J. Lee H. Yeld Spreads as Alternatve Rsk Factors for Sze and Book-to-market J. Journal of Fnancal and Quanttatve Analyss Pagan A. R. and K. A. Sossounov. A Smple Framework for Analysng Bull and Bear Markets J. Journal of Appled Econometrcs Klbanoff P. Lamont O. Wzman T. A. Investor Reacton to Salent News n Closed-end Country Funds J. Journal of Fnance Peress. J. Meda Coverage and Investors'Attenton to Earnngs Announcements M. Workng Paper INSEAD
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