This dissertation investigates the relationship between interest rates and the UK stock market from January 2010 to December 2023. Interest rates are represented by the 10-year UK Bond Yield while the FTSE100 index serves as the proxy for the UK stock market. The study employs a multivariate Vector Autoregression (VAR) and Vector Error Correction Model (VECM) analysis to examine the long-run and short-run dynamics and comparative relationships between interest rates and the UK stock market across two sub-periods, periods of economic normality and unrest. The USD/GBP exchange rate and Brent crude oil prices are included as control variables in the model. ARCH/GARCH models are then utilised to analyse the response of the variables to a 1% increase in interest rates, showing an unexpected increase in interest rates initially has a positive impact on the FTSE index, however, after a few periods the effect becomes insignificant, suggesting that the stock market adjusts to the new interest rate environment over time, resuming the traditional inverse relationship. Corroborating traditional theories, the findings of this dissertation also reveal a significant negative long-run cointegrating relationship between interest rates and the UK stock market prices, contrasting the positive short-run association. Following the VAR/VECM analysis, the study focuses on the COVID-19 pandemic crisis period. Ordinary Least Squares regressions are conducted to uncover and compare the relationship between interest rates and the UK stock market during this crisis, revealing a less negative relationship compared to periods of economic normality, contradicting literature on the traditional relationship. Furthermore, the study explores whether the relationship between interest rates and stock prices varies across industries using ARCH/GARCH models. Stock price data from nine firms, three in financial services, three in utilities and three industrial firms are analysed to assess their response to a 1% positive fluctuation in interest rates. The findings suggest that the financial services industry is most responsive to interest rate fluctuations, supporting the hypothesis that interest rates disproportionately impact specific industries and corroborating with existing literature.
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