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Returns and interest rate: A nonlinear relationship in the Bogotá stock market

By Luis Eduardo Arango, Andrés González, Carlos Esteban Posada and Banco De La República

Abstract

This work presents some evidence of the nonlinear and inverse relationship between the share prices on the Bogotá stock market and the interest rate as measured by the interbank loan interest rate, which is to some extent affected by monetary policy. The model captures the stylised fact on this market of high dependence of returns in short periods of time. These findings do not support any efficiency on the main stock market in Colombia. Evidence of a non constant equity premium is also found. The work uses daily data from January 1994 up to February 2000. JEL classification: C22, C52. Key words: nonlinearities, stock returns, interest rate, smooth transition regression, GARCH models. The opinions expressed here are those of the authors and not of the Banco de la República, the Colombian Central Bank, nor of its Board. We thank Luis F. Melo for his comments and suggestions although any remaining errors are solely ours. 1 I

Year: 2011
OAI identifier: oai:CiteSeerX.psu:10.1.1.198.5253
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