The impact of Interest Rate on Stock Market: Empirical Evidence from Dhaka Stock Exchange

Stock exchange and interest rate are two crucial factorofeconomic growth of a country. The impacts of interest rate on stock exchange provide important implications for monitory policy, risk management practices, financial securities valuation and government policy towards financial markets. This study seeks evidence supporting the existence of market efficiency on the Dhaka Stock Exchange (DSE) based on the daily general price index 1994 to 2005 and also shows empirical relationship between stock index and interest rate in Bangladesh based on monthly data from May /992 to June 2004. Stationary of market return is tested and it is found that DSE Index does not follow random walk model, which indicates that DSE is not efficient in week form. The linear relationship between share price and interest rate, share price and growth of interest rate, growth of share price and interest rate, and growth of share price and growth of interest rate are determined through ordinary least-square (OLS) regression. For all of the cases, included and excluded outlier, it is found that Interest Rate has significant negative relationship with Share Price and Growth of Interest Rate also has significant negative relationship with Growth of Share Price. So if the interest rate is considerably controlled in Bangladesh than it will be the great benefit of Dhaka Stock Exchange through demand pull way of more investor in share market and supply pull way ofmore extensional investment of companies.

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