Exploring the Dynamic Relationship between Interest Rates and the Movement of the Jamaica Stock Exchange (JSE) Indices: A Time-Series Analysis

Shaneille Samuels^1,

¹Division of Mathematics, School of Mathematics & Statistics, Faculty of Science & Sports, University of Technology, Jamaica, St. Andrew, Jamaica

Cite this paper:
Shaneille Samuels. Exploring the Dynamic Relationship between Interest Rates and the Movement of the Jamaica Stock Exchange (JSE) Indices: A Time-Series Analysis. Journal of Finance and Economics. 2024; 12(4):111-122. doi: 10.12691/jfe-12-4-4

Abstract

This research study delved into the intricate relationship between the 88-93-days Treasury Bill Rates and the movement of Jamaica Stock Exchange (JSE) indices within a time-series context during the period of 2012 to 2022. The indices used in this study are the Main Index, the JSE All Jamaica Composite Index, and the JSE Select Index. Through meticulous quantitative analysis, the study aimed to unveil the underlying nature of this relationship by examining how changes in the rates influence the behaviour of the JSE indices for 2012 and 2022. This analysis involved the usage of correlation, time-series, and regression analysis, which was completed with the use of SPSS, R for time-series, and [online] GraphPad. The study explored statistical tests such as Pearson Product Moment Correlation, the Time-Series Differencing method, and the forecasting models HoltWinter and SARIMA models. The findings revealed that there is a significantly strong negative correlation between the JSE indices and 88-93-days Treasury Bill Rates with a correlation of approximately -0.78 or less but not less than -1 and having p-values smaller than 0.05. Thereby an inverse relationship was revealed to exist where almost one unit change in the rates results in approximately 1 unit change of each index. The study also revealed that there was no trend nor randomness seen in the decomposition of the rates or decomposition of the indices, but seasonality was captured which repeated itself each year. It was difficult however to remove the seasonality to ensure that the data was stationary; eventually, after using logarithm transformation followed by differencing of the data, stationary was almost achieved. With the non-stationary datasets, models such as HoltWinter and SARIMA were used to identify trends and patterns using prediction, but both could not fit the data because the data was insufficient mostly because of data unavailability of monthly periods to identify and use appropriate time lags. The study facilitated the use of regression equations to drive the prediction of the JSE indices and how they move along with the rates. Also, there was a slight deviation of the expected pattern found during 2020 and 2021 when a statistically significant perfect correlation [with a coefficient of +1] between the rates and indices as Jamaica recovered from the pandemic, which indicated that as 1 unit of the rates increase so did 1 unit of each index value. The study implied that investors could garner knowledge of the relationship and a greater understanding of both BOJ and the JSE stock market to help minimize their panic during economic downturns such as the COVID-19 pandemic.

Keywords:
time-series interest rates performance stock exchange indices

This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]	Jamaica Stock Exchange. A Guide to Jamaica Securities Markets: Providing a Fair Efficient and Transparent Stock Market. 2020. https://www.jamstockex.com/wp-content/uploads/2020/07/A-Guides-to-Jamaica-Securities-Stock-Market.pdf.
[2]	BOJ cuts interest rates again. Jamaica Gleaner. 20 August 2009. https://jamaica-gleaner.com/power/11847.
[3]	BOJ cuts interest rates again. Jamaica Gleaner. 19 August 2015. https://jamaica-gleaner.com/article/business/20150817/boj-cuts-interest-rates-again.
[4]	JSE roiled by virus as investors head for safe haven. Jamaica Gleaner, 21 March 2020. https:// jamaica-gleaner.com/ article/business/ 20200320/jse-roiled-virus-investors-head-safe-haven.
[5]	Chatfield, C. The Analysis of Time Series: An Introduction (6th ed.). Chapman & Hall/ CRC, 2003.
[6]	Beers, B. Regression: Definition, analysis, calculation, and example. Investopedia, 25 November 2003. Retrieved November 18, 2024, from https:// www.investopedia.com/ terms/r/ regression.asp#: ~:text=Regression% 20is%20a% 20statistical% 20method% 20that%20tries% 20to%20determine% 20the,%2C%20investing% 2C%20and%20other% 20disciplines.
[7]	Kenton, W. Neoclassical economics: What it is and why it's important. Investopedia, 28 May 2023. Retrieved August 23, 2023, from https://www.investopedia.com/terms/n/neoclassical.asp.
[8]	Miller, M., & Modigliani, F. The Cost of Capital, Corporation Finance, and the Theory of Investment: Reply. The American Economic Review, 1958.
[9]	Muth, J. Rational Expectations And The Theory Of Price Movements. JSTOR. July 1961. https:// www.fep.up.pt/ docentes/pcosme/s-e-1/se1_trab_0910/se1.pdf.
[10]	Tardi, C. Rational expectations theory definition. Investopedia, 8 June 2020. Retrieved August 18, 2023, from https:// www.investopedia.com/terms/r/rationaltheoryofexpectations.asp.
[11]	Fisher, I. The Theory of Interest. The Macmillan Company, 1930.
[12]	Seabury, C. How interest rates affect the U.S. markets. Investopedia, 25 March 2023. Retrieved August 23, 2023, from https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets. asp#:~:text= When% 20interest% 20rates% 20are%20rising,causing%20stock%20prices%20to%20rise.
[13]	Rose, D. Mortgage rates going up. Jamaica Observer, 26 May 2023. https://www.jamaicaobserver.com/business/mortgage-rates-going-up/#:~: text= Homeowners% 20are% 20set%20to% 20face%20a% 20double% 20whammy,per% 20cent% 20since% 20the% 20start%20of%20the%20year.
[14]	Ngubeni, N. What are the effects of interest rates on the stock market? IG, July 2023. Retrieved August 23, 2023, from https://www.ig.com/en/trading-strategies/what-are-the-effects-of-interest-rates-on-the-stock-market-220705.
[15]	US Bancorp. How do rising interest rates affect the stock market? | U.S. bank. Consumer banking | Personal banking | U.S. Bank,19 July 2023. Retrieved August 23, 2023, from https:// www.usbank.com/ investing/ financial-perspectives/ market-news/how-do-rising-interest-rates-affect-the-stock-market.html.
[16]	Fidelity Investments. What is a yield curve? - Fidelity. Fidelity Investments - Retirement Plans, Investing, Brokerage, Wealth Management, Financial Planning and Advice, Online Trading. 2023. https:// www.fidelity.com/ learning-center/ investment-products/ fixed-income-bonds/ bond-yield-curve#:~: text= different% 20maturity% 20dates.-,A% 20yield% 20curve% 20is%20a% 20way% 20to% 20measure% 20bond% 20investors,the% 20direction% 20of% 20the%20economy.
[17]	The Investopedia Team. How central banks affect interest rates. Investopedia, 23 August 2023. Retrieved August 23, 2023, from https:// www.investopedia.com/ask/answers/031115/how-do-central- banks-impact-interest-rates-economy.asp.
[18]	Pompian, M. Risk Tolerance and Behavioral Finance. 2017. https://investmentsandwealth.org/getattachment/0a603493-fce1-4ab9-8d6a-3e78e1178f93/ IWM17MayJun-Risk ToleranceBe havioral Finance.pdf.
[19]	GraphPad. Linear regression calculator. 2023. https://www.graphpad.com/ quickcalcs/linear2/.
[20]	Chen, J. Treasury Yield: What It Is and Factors That Affect It. Investopedia, 30 June 2023. Retrieved August 24, 2023 from https:// www.investopedia.com/ terms/t/treasury-yield.asp#:~: text=Treasury% 20yields%20reflect% 20investors'% 20assessments,outlook% 20and%20higher% 20inflation% 20expectations.
[21]	Bank of Jamaica. Bank of Jamaica 2012 Annual Report. Bank of Jamaica, 2013. https:// www.boj.org.jm/ uploads/news/ boj_ annual_report_2012.pdf.
[22]	Jamaica Stock Exchange. JSE Yearbook 2017. 2018, https://www.jamstockex.com/wp-content/uploads/2018/09/JSE-YEARBOOK-2017.pdf.
[23]	Jamaica Stock Exchange. JSE Yearbook 2018. 2019, https://www.jamstockex.com/wp-content/uploads/2020/09/JSE-YEARBOOK-2018-.pdf.
[24]	Jamaica Stock Exchange. JSE Yearbook 2019a. 2020, https://www.jamstockex.com/wp-content/uploads/2021/01/JSE-YEARBOOK-2019a.pdf.