The paper "The Australian Securities Exchange and Interest Rates" is a great example of a finance and accounting case study. In financial economics, interest rates and the stock exchange are two important factors that determine the economic growth of a country. Ideally, the effects of interest rate on a country’ s stock exchange present significant implications for hedging and other risk management practices, stock market securities valuation, the monetary policy, and other government policies towards financial markets. This research aims at presenting supporting evidence on the existence of a negative relationship between stock prices and interest rates based on the monthly data of two ASX200 companies (Suncorp-Metway Ltd and CSL Ltd) from January 2000 to December 2010.
In order, the relationship between the share price of Suncorp-Metway Ltd and CSL Ltd and interest rate, changes of the two companies' share price and the changes in the interest rate were obtained from time-series data. The research conducts a correlation analysis between the firms’ stock prices. For both companies, it is found that the interest rate has a noteworthy negative relationship with the stock price.
The correlation between interest rates and SUN corp’ s share price is positive (0.55) indicating that there is a positive relationship between interest rates and the company’ s share price. On the other hand, the correlation coefficient between interest rates and CSL’ s share price is 0.026. This indicates that there exists a positive relationship between the company share price and interest rates but the relationship is weaker compared to that of SUN corp. Therefore, it is concluded that if the interest rate is significantly controlled by the Australian government, it will yield great benefits for the Australian Securities Exchange by creating a demand-pull effect of potential investors in the share market, and also by triggering a supply push effect whereby more investment will be made by companies listed on the ASX.
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