Asymmetric Reactions of China¡¯s Stock Market to Short-term Interest Rates
2016
This paper investigates how Chinai¯s stock market reacts to short-term interest rates, as represented by the Shanghai Interbank Offered Rate (Shibor). We adopt the Markov Regime Switching model to divide Chinai¯s stock market into Medium, Bull and Bear market; and then examine how Shibor influences market returns and risk in different market regimes. We find that short-term interest rates have a significant negative effect on stock returns in Medium and Bull market, but could not affect stock returns in Bear market. In addition, different maturities of Shibor have different effects on stock returns. Furthermore, we find that the short-term interest rates have a negative effect on market risk in Bull market, but a positive effect in Bear market. Our findings show that Chinai¯s market is quite peculiar and distinctive from the U.S. market or other developed countriesi¯ markets in many ways.
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