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Dissertation: Relationships between Stock Returns and Interest Rates in South-East Asia (Part 1 of 5)


This is a study on relationships between changes in interest rates to stock market returns in South East Asia. Overall, it is found that correlation coefficients between changes of interest rates to stock returns in Indonesia, Singapore, Malaysia, Philippines, and Thailand are not statistically significant, i.e., no evidences supporting the hypotheses that changes in interest rates are statistically related to stock returns in these countries. Worse, the sign of the correlation coefficient between changes of interest rates to stock returns in the respective countries are not consistent. Nevertheless, it is discovered that stock returns of the different countries are indeed statistically significantly and positively related to each others. Then, it is also discovered that the changes of interest rates seem to move in tandem among the countries being studied.


1.1 Background of the Research

Stock market has long been the fascinating place to the financial fraternity as there is a lot of money to be made if someone able to predict the movement of the market. The existence of high performing investors such as Warren Buffett, George Soros, Peter lynch, John Templeton, Kenneth Fisher and many others indicates that there are approaches to yield better than averages performance than the return of the broad stock market index. As such, to find out a useful ways to predict the stock market or to understand how the market works is often perceived as worthy pursuits by investors or speculators.

However, to predict the future movement of stock return is never an easy task. The work to predict stock market return is highly challenging, as there are many factors that can affect the stock market movement in the future. Various approaches to predict stock market returns are available, where the two famous techniques include fundamental and technical analysis. Apparently, fundamental analysis is perceived as a better way to deal with the task of stock market prediction, as such approaches is less subjective in nature (Malkiel, 2007). Under the fundamental approaches, the many approaches can be categorized into four main categories, as follow: statistical methods, risk premium approach, discounted cash flow methods, and financial market equilibrium methods (Maginn, Tuttle, Pinto & McLeavy, 2007).

In this dissertation, the statistical methods will be used. In other words, the use of statistical tools, techniques and software to analyze the relationship of stock market return to other predicting variables will be investigated under this dissertation. The predicting variables to be used will be the macroeconomic variables widely used by economists in gauging the strengths or weaknesses of the economic activity for a country. There are many macroeconomics variables available, namely interest rates, consumer price index, industrial production index, gross domestic products, money supply, oil prices and many others.          However, a research on all of the available macroeconomic variables to stock market returns will be a daunting task, as there are too many economic variables available in the marketplace. Not only is that, to trace all of the economic variables is also not rationale, as the time required can be demanding and to do so may perhaps impossible pursuits for individual investors, considering there are so many economic variables being releases each and every day around the world. Apart from that, it is also noted from books about legendary investors that not every economic variables are given attentions by them, indicating that perhaps a small amount of variables may already sufficient to help them make rational and reasonably accurate judgment on investment decisions. In fact, one common economic variable often traced and discussed by the legendary investors as well as economists is the interest rates. As will be discussed and articulated in the Literature Review section in this dissertation, there are many reasons interest rates can be powerful in influencing and predicting the stock market returns in a country.  As such, in this research, interest rates will be used to predict the stock market return.


1.2 Rationale of the Research

The reasons of conducting such research are not hard to understand. Firstly, if there are obvious statistical relationships that can be found between interest rates and stock market return, then more studies can be conducted in the future to investigate how to utilize such information to yield better than average performance from the stock market. This is a valid and strong reason because if we can find evidences that interest rates have significant impacts towards changes of stock market returns in the future, it suggests that there are statistical evidences supporting the conduct of more in-depth and comprehensive studies on utilization of information related to interest rates to predict stock market in the future. Secondly, by performing such research, we can understand if interest rates are also useful to predict stock market return from country such as Malaysia. In brief, the relationships between interest rates in Malaysia to the stock market returns for the past ten years will be investigated, suing statistical concepts such as correlation coefficient. The Malaysia stock market is selected in this dissertation, as many such kind of research had already been performed in the more advanced and popular countries. For example, similar kind of research had been performed by Kraft and Kraft (1977), Chen, Roll, and Ross (1986), Bodurtha, Cho, and Senbet (1989) in the United States. Other countries that had been studied by other researchers include United Kingdom, Canada, France, Germany, Singapore, Greece and many others. Perhaps Malaysia is not the highly developed or highly potential market being placed serious attentions by investors, research on that country is lacking, and indeed, according to the understanding of the author, never been done before. As such, a study on the relationships between interest rates and stock market return in Malaysia is indeed justifiable. Thirdly, as the study will employ the latest 10 years data for analysis purposes, such a research can inform readers if the relationships between interest rates and stock market returns remain valid despite many people already understand that certain macroeconomic variables may have predicting power to time the market. This is because the notion about certain economic variables may be useful to predict stock market returns may already be adopted by investors, and hence, most likely to lost the predicting power in the recent years. As such, research is necessary to understand if interests still remain a valid economic variable useful in predicting stock market returns in the recent years.

1.3 Research Objectives

Following the arguments presented above, the following research objective can be formed: to understand the relationships of interest rates to stock market return in several countries in South East Asia, namely, Indonesia, Singapore, Malaysia, Philippines, Thailand and Brunei Darussalam. Specifically, this study is designed to understand the statistical relationships, namely the Pearson correlation between stock market returns to the changes of interest rates in stock exchanges of these respective countries. Specifically, two research objectives can be stated as follow:

  1. To review and investigate the existing literatures regarding the relationships between interest rates to stock returns.
  2. To review and investigate the empirical evidences related to stock returns and other predicting variables in the context of South-East Asia.
  3. To investigate if there are statistical significant correlation between interest rates and stock market returns in the stock market of countries in South East Asia, namely: Indonesia, Singapore, Malaysia, Philippines, Thailand and Brunei Darussalam.


1.4 Structure of the Dissertation

The dissertation is structured as follow. In this first chapter, the background relevant to this research is investigated. By providing the background relevant to the research topic, the context and scope of this research will be defined and identified. It will also provide the relevant context to this dissertation. Then, the rationales of this research will also be articulated. More importantly, the two key research objectives in this dissertation will also be outlined. Then, in Chapter 2, a comprehensive literature review will be performed. Discussions will be focused on the relevant theories on interest rates as well as the impacts towards stock market returns. Besides, previous studies on the topic will also be discussed, and their findings on interest rates and the respective impacts to stock market will also be presented. Chapter 2 should be able to provide the relevant theoretical setting and empirical evidences crucial for the discussions in the following chapters. In Chapter 3, research methodology will be discussed. Specifically, an overview of the research design and the statistical tools or models used in the design will be outlined. The general research philosophies employed will also be discussed. The rationales of choosing the research methodologies and statistical tools will also be presented. Then, description and explanation on the statistical concepts and tools to be used in the study will be presented. Next, in Chapter 4, data analysis will be performed. In this chapter, the relevant descriptive statistics for the data used will be presented. Then, the data derived from analysis and simulation will also be presented. A discussion on the research findings will also be articulated. Later, in Chapter 5, conclusion will be presented. Based on the research objectives defined earlier, the research findings in the context of the research objectives will be presented. Not only is that, suggestions on viable topics useful for further research will also be presented.



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