The Dynamic Linkage Between Interest Rates and Stock Prices: An Application of ARDL Bound Test
DOI:
https://doi.org/10.37591/njfpm.v3i1.466Keywords:
ARDL, CUSUM square test, ECM model, interest rate, NEPSE index, stock price, time-series data.Abstract
The purpose of this research paper is to investigate the effect of interest rate on stock price in the Nepali market by applying time-series monthly data from 2010to-2019 periods. This study examined the linkage between NEPSE index and interest rate (90-day T-Bill) using the autoregressive distributed lag mode(l) and error correction model to explain the behavior of the Nepal stock market. The reliability and validity of our estimations are confirmed by the application of cumulative sum of recursive residual ()square test. The result shows that the interest rate has a significant effect on stock price in the short run however, in the long run, there is no relationship between the interest rate and stock price. The findings of the research can be helpful to understand the behavior of the Nepal stock market and to develop policies for market stabilization. In the Nepalese context, the effect of interest rate on the stock price on monthly data has been studied for the first time.
