Recently, there are more and more financial analysts have dedicated their studies to the relationship and emerged trends between different financial markets such as studies of Dalkir (2009) and Savva (2009) on stock markets inner relationship, or relationship between bond markets and stock markets by Lim et al (1998), Shiller and Beltrani (1992) or Solnik et al.(1996) on those trend between both domestic and international market. Most of the findings suggested that bonds, stock and foreign exchange markets are closely related. Some other researches such as Connolly et al.(2005), Boyd et al. (2005), Kim et al. (2006) and Yang et al.(2009) also incorporate macroeconomics indicators into examining the correlation between stocks and bonds by considering business cycles and monetary policy. Assets price are believed to react sensitively to market information, macroeconomics policy and unanticipated events.
This paper aims to analyze the interactions between financial markets, the relationships between stock and bond markets, bonds yield and foreign exchange market as well as market efficiency. Those relationships will be investigated based on the elementary rules of economic theory with empirical evidence from Canadian financial markets. In this paper, the sample consists of data of close price of Bank of Canada, Methanex Corporation, Manulife Financial and TSX Index stock and Canada Government Bond yield for the period from 26th August to 25th October 2013. All of the data are collected from reliable financial source such asYahoo Finance and Bank of Canada and Federal Reserve on a daily basis.
[...] All of the data are collected from reliable financial source such asYahoo Finance and Bank of Canada and Federal Reserve on a daily basis. Discussion 1. Trend in Financial Markets Stock Market Figure 1. Toronto Stock Market Performance ( adapted from Yahoo Finance, 2013) Overall, in the last two months, Canadian stock markets performed much better than expected. The TSX Composite Index raised by in two months, while stocks from large corporations such as Bank of Canada and Methanex Corporation increased significantly by 13% and 20% respectively. [...]
[...] According to Table.1, there was statistically significant correlation between TSX, Bank of Canada, Methanex Corporation Stock price with Bond yield years) and T-bill yields months). The result indicates a negative relationship between stock market and bond yield, and strong positive relationship between t-bill and stock price. However, Manulife's stock value does not follow any pattern of other players in the financial markets. There was no significant relationship between Manulife's stock price and any short-term or long-term interest rates during the analysed period. Table 1. [...]
[...] Figure 8. Rate of change in Canada Benchmark Bond Yield and Treasury Bill Yield and USD/ CND Exchange Rate.(Bank of Canada, 2013) Because of close connections between Canadian and American financial markets, the difference between monetary policies in these two countries can influence the Canadian-US exchange rate severely (Bank of Canada, 1995). If Canadian monetary policy is significantly more expansionary than US policy, Canadian dollar will tend to depreciate in relation to the US dollar and vice versa. Taking this fact into consideration, Canadian policymakers have to study the combined effects of interest rate and exchange rate. [...]
[...] The linkage between financial markets is still a fundamental subject to study in order to establish a successfully asset- allocated investment portfolio. Future analysis in depth, which taken into consideration all possible factors with a more robust approach, should be made to determine the actual relationships between financial markets. APPENDIX Table 2. Daily Data on Canadian's Financial Market Dates Manulife Financial Bank of Canada Methanex Corporation Toronto Stock Exchange Bond Yield 5 years Bond Yield Longterm (over 10 years) REFERENCE Bank of Canada Monetary Conditions Index. Retrieved from http://www.bankofcanada.ca/wp-content/uploads/2010/06/r954c.pdf Bank of Canada Rates and Statistics, Exchange Rates. [...]
[...] Manulife Financial Corporation Technical Analysis Bond Markets Figure 6. Change in Canada Benchmark Bond Yield and Treasury Bill Yield.(Bank of Canada, 2013) Overall, Canadian bond yield is decreasing. Among the three types, Canadian 5 year bond's variation is the most considerable. It has swing upwards and downwards swiftly in cyclical pattern, increased over 15% before starting to drop in the end of September. Treasury Bill Yield months) is quite stable and is expected to be maintained at a low level. [...]
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