An Empirical Study On The Relation Of Price And Its Volatility Spillovers Between Interest Rate And Stock Markets

With the development of communication technology and financial liberalization, the information transfer is faster and faster. So the trading cost is lower and lower among the international financial markets. Money and stock markets are important markets in every country. In the background of repealing financial regulation, their relationship should do exist. Using cointegration theory and multivariate EGARCH model, this paper studies the relationship of price and its volatility spillovers between interest rate and stock markets.Firstly, this paper analyzes the theory model and influence mechanism between interest rates and stock price, and also analyzes the cause mechanism of the volatility spillovers. Secondly, cointegration test is used to empirically study on their relationship. Thirdly, JB statistics and LB-Q statistics are introduced to analyze the interest rate return and stock market return serials. Fourthly, the LM test, sign bias test are used to test the ARCH effect of residual serial and the asymmetry of the conditional volatility after introducing multivariate EGARCH model. Lastly, with the multivariate EGARCH model, this paper makes an empirical analysis on the volatility spillovers effect between interest rate and Shanghai (or Shenzhen) stock markets, this paper also investigates the applicability of the model by testing the standardization residual.The results shows that there is significant cointegration relation between the interest rate and Shanghai (or Shenzhen) stock price; there are statistically significant bi-directional volatility spillovers between them, which demonstrates the existence of information flow; volatility spillovers are asymmetry except the direction of interest rate to Shenzhen stock market. The studies mentioned above are significant to collocate asset portfolios and prevent financial risks.