Testing precedence relationship between Stock markets and Interest rates: Evidence from India

This paper investigates the relationship between interest rates and stock market performance by using weekly time series data from 2003 to 2015. We use Johansen cointegration test to check the long-term relationship between interest rates of different duration (short-term to long-term) and different equity indices (narrow-based and broad-based) of Indian stock market. We find no evidence of long-term relationship between the two variables. We also use the Granger causality test to check the precedence of one variable over the other. Contrary to our assumption and popular belief, we find that stock market performance has precedence over interest rates, i.e. equity indices Granger cause interest rates.