Transmission Of Interest Rates Volatility: A Case Study Of Upper, Middle And Lower Income Groups Countries

Abstract

With the development of liberalization of capital movements, an increasing attention has been given to international transmission of volatility to different market returns. This article empirically tests the effects of the volatility in the time value of the US t bills and RBI t bills on the developed, developing, and underdeveloped market. By using daily values of twelve equity markets and the interest rates on the 10 years treasury bills from 2000 to 2010, the Gaussian and Student’s-t GARCH models are tested to display the international Transmission effects of the US and Indian interest rates on the world equity markets. The empirical findings vary between the sub-economy groups. The equity markets in the upper, middle, and lower income group do not have strong interestrate effects. The markets are affected by the volatility in the US and RBI interest rates at low levels. On the other hand, impacts of the volatility in the US interest rates on the domestic money markets –i.e. bond spreads- in the emerging economies are stronger with negative direction.