Study on Impact of Interest Rates on Stock Prices

Abstract

The impact of interest rates on stock prices, highlighting the intricate relationship between these twovariables. Interest rates play a crucial role in shaping the financial markets, and their fluctuations can significantly influence stock prices. This study aims to explore and understand the complex dynamics that underlie this relationship by examining various empirical studies, theories, and real- world examples. The impact of interest rates on stock prices is a topic of great importance to investors, policymakers,and financial analysts. Changes in interest rates can directly affect the cost of borrowing, discout rates, and investors' expectations of future cash flows. Consequently, these factors have a profound impact on stock valuations and investor behavior. Empirical evidence suggests that there exists an inverse relationship between interest rates and stockprices. When interest rates rise, borrowing costs increase, leading to higher discount rates for future cash flows. As a result, stock valuations decrease, leading to a potential decline in stock prices. Conversely, when interest ratesfall, borrowing costs decrease, and discount rates for future cashflows decline, which may boost stock prices. This study also examines the transmission mechanisms through which interest rate changes impact stock prices. It explores how changes in interest rates affect investor sentiment, borrowing and investment decisions, and overall market liquidity. Additionally, it investigates the potential spillover effects between equity markets and other financial markets,such as bond marketsand foreign exchange markets. Understanding the impact of interest rates on stock prices is crucial for investors and policymakers in making informed decisions and formulating effective monetary and fiscal policies. Bycomprehensively analyzing the existing literature and empirical evidence, this study aims to provide valuable insights into this complex relationship, offering guidance for investors and policymakers navigating the ever-changing financial landscape.