The relationship between short-term interest rates and stock prices is important to understand. Changes in the interest rate can have a significant impact on stock prices. In this report, I will use an econometric model to examine this relationship.
I will use a multiple regression model to examine the relationship between short-term interest rates, GDP, CPI, and stock prices. I will also include lagged values of the stock price to capture the dynamic nature of the relationship.
[log(y) c Int log(gdp) Incpi log(ir) ar(1)]
The regression results show that interest rates, GDP, and CPI have a significant impact on stock prices. Interest rates have a negative effect on stock prices, while GDP and CPI have a positive effect. The lagged stock price also has a significant positive effect on stock prices. The model is well-specified and does not suffer from heteroscedasticity or serial correlation.
In conclusion, the results of the regression suggest that changes in short-term interest rates have a significant negative effect on stock prices, while GDP and CPI have a significant negative and positive effect on stock prices, respectively. The lagged stock price has a significant positive effect on the current stock price.
