Effects of Interest rates and Inflation Rates on Stock Price Volatility: A Granger Causality Approach

Abstract

This paper deals with the Granger Causality analysis to review the impact of U.S. interest rates and various inflation rates on the  different companies’ stock price volatilities and the explicit correlation between them. The interest rates are used as they are  important indicator of volatility measurement and inflation rates are used to be a measure of implicit estimate of the stock price  movement. After performing the test using R package the results make it essential to understand how the different interest rates and inflation rates behave over time especially granger causes each other. The data set that we used is extracted from the St. Louis Fed are  all daily sector data over the period of June 2008 to December 2017 and the technique of autoregressive lag model (ARLM) are  applied in investigating the trend behavior of the interest rates as well as the inflation rates over any influence on the stock indices.  The result indicates that interest rate and the inflation rate Granger Causes each other quite significantly whereas inflation rates have  not Granger causes the stock price volatility. However, interest rates establish a causal relationship among those stock price volatilities  and the inflation rates.