Changes in interest rates, and stock markets

Abstract

Changes in interest rates have long been a subject of interest for economists and market analysts, particularly for their significant impact on stock markets. In the context of the United States of America, the United Kingdom, and the European Union, interest rate fluctuations play a crucial role in shaping market behaviour, influencing investor decisions, and determining overall market performance. Interest rates affect the cost of borrowing, corporate profitability, and the attractiveness of stocks relative to bonds, thereby impacting stock valuations. This research focuses on analysing the effects of interest rate changes on stock market performance across these major economic regions. Utilizing a quantitative approach, the study applies an econometric regression model to assess the relationship between interest rate movements and stock market indices in the United States of America, the United Kingdom, and the European Union. The findings indicate that stock markets in all three regions react differently to interest rate changes, though the magnitude and direction of the effects vary depending on the region. The United States of America’s results show a significant negative relationship between interest rates and stock market index prices, whilst the United Kingdom and the European Union markets display less significant relationships. Additionally, different time periods had presented different results, which could be a result of a low-interest rate environment or due to the Covid-19 Pandemic. This research highlights the critical role that central bank policies play in stock market dynamics, particularly in volatile economic environments.