Modelling delayed correlation between interest rates and equity market returns

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dc.contributor.authorYalla, Brian Opiyo
dc.date.accessioned2021-06-28T07:44:34Z
dc.date.available2021-06-28T07:44:34Z
dc.date.issued2020
dc.descriptionDissertation submitted in partial fulfillment of the requirements for the Degree of Master of Science in Mathematical Finance at Strathmore Universityen_US
dc.description.abstractThis study models the interaction between interest rates and equity markets using wavelet analysis. This approach facilitates assessment of the lead-lag relationships in an intuitive way considering variation across frequencies and over time. Analysis is done progressively on varying scales where the lower scales encompasses high frequency components of the data over shorter time scales whereas higher scales encompass low frequency components over longer time scales. The study uses daily data obtained from Kenya for the period October 2003 to October 2019. The Nairobi Securities Exchange 20 share index returns are used as a proxy for equity returns whereas the interbank rates represent interest rates. Three key findings emerge: (1) There is at least two months delay in the correlation between interest rates and equity market returns, (2) The correlation is lower (correlation coefficients of 0.3 and below, including negative correlation coefficients) in the lower time scales of 4 to 8 days and higher (correlation coefficient of 0.3 and above) in higher time scales of 512 to 1,024 days, and (3) Equity returns lead interest rates in Kenya during the period of study. Unlike common practice of assuming joint stationarity of variables, the findings reiterate the need for modelling dynamic relationships considering delays, time variation and scaling over time horizons.Investors, portfolio managers and policy makers alike should therefore be cognisant of the dynamic nature of the relationship between interest rates and asset markets bearing in mind that changes in one variable may not have immediate impact on the other.en_US
dc.identifier.urihttp://hdl.handle.net/11071/12026
dc.language.isoenen_US
dc.publisherStrathmore Universityen_US
dc.subjectWavelet analysisen_US
dc.subjectInterest ratesen_US
dc.subjectEquity returnsen_US
dc.subjectWavelet coherenceen_US
dc.subjectDelayed correlationen_US
dc.titleModelling delayed correlation between interest rates and equity market returnsen_US
dc.typeThesisen_US
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MSc.MF Theses and Dissertations (2020)