A Critical Analysis of the Correlation Between Interest Rates and Selected Securities

Abstract

With the federal deficit and the threat of fluctuating interest rates, it is important for investors to know the effects that interest rates have on securities. The causes of high interest rates and the significance of these causes are difficult to document, but it is possible to record the levels and incremental changes of interest rates along with the subsequent impact on securities. Currently, the stock market is plagued with the worries of rising interest rates which has resulted in a serious downtrend in stock prices. Since stocks are the most "visible" of securities, they will be the major focus of this report. However, both bonds (government issues) and gold prices will be covered. A few theories of interest-sensitive as well as some advice from money managers regarding strategies of investing, given an interest rate forecast, will be discussed. However, the processes behind economic forecasting are beyond the scope of this report. In addition to the theories of interest rate sensitivity, results from a recent correlation study will be presented; the correlational analysis was done on the College of Business' QSTAT program.