Business Research Methods, assignment help

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For this Assignment -

Part A - Literature Review - 1000 words maximum.

Part B - Research Method -1000 words maximum.

Develop a research action plan - Use the given table and make table based on the topic - not included in the word count.

And do literature review and research methods part according to the attached files. 

Due Date - 25th September, 2016

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Impact of Interest Rates on Financial Markets
Name
Instructor
Institutional Affiliation
Date

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Introduction
A financial market refers to a market where investors trade financial securities and
instruments and other valuable items at a price that is determined by the law of supply and
demand. Examples of securities that are traded on the financial market include bonds, shares,
derivatives like forwards and futures, and precious metals among others. Interest rates on the
other hand refer to the proportion that is charged on loans as interest to the borrower. It’s usually
expressed in terms of annual percentage of the outstanding law. Interest rates have an impact on
financial markets. Specifically, it has an inverse relationship with financial securities and
instruments traded in the financial markets. This therefore means that when one goes up, the
other one goes down. This research paper will focus on the impact that interest rates have on
financial markets. Since, financial markets provides a great investment opportunities for
individuals, firms, government and other bodies, it is therefore important to analyze the impact
that an increase and/or decrease on the interest rates will have on the ability of the
aforementioned entities to invest in the financial markets.
Literature Review
There are several studies that have been conducted in this particular topic. Below is a
review of some of the studies carried out to evaluate how interest rates affect the financial
markets.
According to Bomfim (2003), there is an contrary association between interest rates and
the prices of financial securities and instruments. According to him, higher interest rate slows
down the economic growth. He argues that borrowing is expensive and therefore companies will
invest less while consumers spend less too. Since higher rates cause lower growth, firms will

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yield lower profits and hence pay fewer dividends. In addition, higher interest will enable
investors (lenders) to invest in banks rather than in financial markets. That is, lenders will rather
save their money in banks and yield high interest rates rather than invest in financial markets.
Bomfim asserts that interest rates and inflation are key variables in determining bond and stock
prices. They are also important variables in determining the level of private investments,
consumption, and debt levels in the economy.
According to Kaminsky and Schmukler (2002) in their book ‘Emerging market
instability: do sovereign ratings affect country risk and stock returns?’ changes in debt ratings
affect financial markets especially in emerging economies. Sovereign debt outlooks and ratings
not only affect the prices of instruments that are being rated but also affect the stocks. According
to them, sovereign debt ratings directly affect the markets of the economies rated and create
cross-country contagion. They further argue that the impact of rating and outlook changes are
often stronger during financial crises, in nontransparent countries, and neighboring economies.
Downgrades usually occur during downturns, whereas upgrades occur during market rallies,
hence promoting the concept that credit rating agencies contribute to the volatility in emerging
financial markets.
Lin (2012) conducted a research study that evaluates the connection between exchange
rates and stock prices, a case study of Asian emerging markets. In his research, he sampled major
institutional changes, like financial crises and market liberalization, in order to investigate how
the long-term and short-term associations change after such events.

The autoregressive

distributed lag (ARDL) model was adopted. This model that was proposed by Pesaran (2001)
allowed him to tackle structural breaks, and handle data that have a range of different orders.
Foreign reserves and interest rates were also included in the analysis so as to reduce possible

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omitted variable bias. From the study, it was concluded that the comovement between interest
rates and stock prices becomes much stronger during financial crisis periods, spillover between
asset prices or consistent with contagion, when linked to tranquil periods. Moreover, most of the
spillovers during financial crisis periods were majorly caused by the channel running from
financial security price shocks to the exchange rate, arguing that governments should initiate
economic growth and development and financial markets to draw capital inflow, hence
preventing a currency crisis.
Fratzscher (2002) in his book ‘financial market integration in Europe: on the effects of
EMU on stock markets’ evaluates the incorporation process of European stock markets since the
1980s. He majorly focuses on the role that EMU, specifically, changes in exchange rate
fluctuations, has played in the incorporation process of financial integration. Based on his
research study, he concluded that the European stock markets have become more integrated since
1996. He also concluded that the EURO area market has increased greatly in significance in
world financial markets and has overtaken USA as the leading market in Europe. Furthermore,
the incorporation of European equity markets is in major part explained by the force towards
EMU, and specifically the elimination of exchange rate fluctuation and volatility in the process
of monetary unification.
In their book, Wongbangpo and Sharma (2002) investigate the growth in some ASEAN
financial markets and their economies in the last 20 years raise empirical questions about the
basic connection between stock price and major macroeconomic variables. They examine the
role of some macroeconomic variables such as interest rates, exchange rates, money supply, the
consumer price index, and the GNP has on the prices of stock and other financial securities in
five ASEAN countries. These ASEAN countries are Singapore, Indonesia, Malaysia, Thailand,

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and the Philippines. Wongbangpo and Sharma try to examine short and long term relationships
between these macroeconomic variables and stock prices. They assert that since stock prices are
linked to key macroeconomic variables in both long and short run, financial policies and/or
government economic policies can yield significant gains in both the sectors.
Dolvin, Jordan, and Miller (2012) in their book ‘Fundamentals of investments: valuation
and management’ argue that there exists a relationship between interest rates and prices of
financial securities.

According to them, higher inflation rate would definitely increase the

interest rates, which will in turn reduce the prices of bonds, since interest rates and bonds move
opposite directions. They assert that market expectations regarding future rate decreases or
increases will also affect the yield curve for government treasury bonds and also affect t he
interest rates given for other debt financial securities. I addition, declining stock and overall
financial instrument prices is an undesirable outcome for investors. Investors would want to see
their investment is yielding profit and maximizing their wealth. In this case therefore, investors
would shun away from any investment that will yield negative return and negatively affect their
return.
Research Method
In order to effectively assess the impact that interest rates have on the share trading
within the security market, the research will focus entirely on the quantitative research methods.
This method will assist in undertaking a numerical analysis of the data collected through the
online survey. It is worth noting that quantitative data provides an important aspect in which
relationship can properly be developed between variables hence making it easier to analyze the
data properly. In this case, quantitative data will provide efficient means of undertaking data

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analysis as it makes it easy to classify features, construct statistical models so as to provide that
explanation of the observable features.
Advantages of quantitative methods
➢ It is more reliable and very objective
➢ Quantitative data can easily be expressed in numerical
➢ It is easy to incorporate statistics in coming up with a generalized finding
➢ It is often easy to reduce the complexity of problem within the study
➢ It is easy to assume the sample within a representative population
Limitation of Quantitative Research methods
➢ It is less detailed as compared to the qualitative data as well it is easy for the researcher to
miss a preferred response from the respondent.
➢ It is not easy to express some qualitative features under study through quantitative
research methods.
Research Strategies
The research will entirely focus on online survey in which the study will be conducted on
the sampling firms, individuals, and other corporations involved in the trading within security
market. Data will be collected regarding the current market conditions as well as how
fluctuations in ...


Anonymous
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