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ISSN 1392-1258. ekonomika 2009 88

INTERRELATION OF MONEY AND CAPITAL MARKETS

Meilė Jasienė Arvydas Paškevičius Professor, Dr. Associated Professor, Dr. Department of International Business School Vilnius University Vilnius University Saulėtekio Av. 9, LT-10222 Vilnius Saulėtekio Av.. 22 Tel. +370 5 236 61 42 Tel. +370 687 38766 E-mail: [email protected] E-mail: [email protected]

Abstract. The structure of financial markets is a constantly developing organism displaying an ever-changing pattern of the weight in the overall financial structure of its constituents such as , money market and the market of financial derivatives as a product of the two markets. The changes and the new developments are caused by a vast number of reasons and factors including the interaction of the markets concerned. The structural changes taking place in the financial markets and the related forecasts are of great importance to the and investment portfolio managers. The financial markets of Lithuania have already become an integral part of the therefore the authors of the present study did not limit the scope of the survey exclusively to the Lithuanian markets and took a broader view by carrying out a survey of the segments such as capital and money markets of a number of Eastern European, Western European, North American States and the Pacific Ocean region, also the trends of the structural developments as well as the factors causing the processes. The purpose of the present study was to assess whether capital and money markets develop in parallel, i.e., the development of one market creates the conditions favourable for the growth and development of the other, or the two markets perform as competitors. The object of the survey: money and capital markets of East European, West European, North American and Pacific Ocean region countries. Methods used: analysis of the research literature, statistical grouping, correlation analysis. Key words: money market, capital market, rate, share prices.

tinctive feature of the two markets is the Introduction maturity of financial claims and obliga- Financial markets cover two very closely tions. All securities and with the ma- interrelated markets – the money market turity shorter than one year are considered and capital market. Both Lithuanian and to be money market financial instruments, foreign authors (Rutkauskas, 1998, p. 27; and the instruments designed to provide Jasienė, 2001, p. 15; Weston, 1992, p.28) -term, i.e., with the maturity in excess are unanimous in their view that the dis- of one year, facilities and investment

66 are defined as capital market financial in- kets; 2) identifying the ratios indicating to struments. The third segment of financial which market the development conditions markets – the financial market – tend to be more favourable; 3) defining, on has originated on the basis of the capital the basis of theoretical sources, the system and money markets. of factors affecting the structural changes A number of financial markets theoreti- of the money and capital markets, also the cians and practitioners (Rutkauskas, 1998; range of ratios providing a basis for the Jasienė, 2001, p. 21; Foley, 1994, p. 9, analysis of the effect of the factors upon the et al.) consider money market to include structural changes in the capital or money such financial instruments as securi- markets; 4) identifying the most significant ties with the maturity less than one year in- ratios-indicators affecting the segments of cluding government securities, negotiable financial markets, such as money and capi- certificates of , , tal markets; 5) retrospectively analysing bankers’ acceptances, certifi- the development of the indicators charac- cates of deposit, etc. terising the capital and money markets in The capital market securities include different countries. ordinary shares and all fixed securities with no fixed maturity or with Peculiarities of investment in money the maturity exceeding one year. This cat- and capital markets egory of securities also includes preferred From the point of investment period long- shares and all types of bonds with a matu- term investment essentially does not differ rity in excess of one year. from the investment into -term se- The value of the derivatives is deter- curities. Shares, which are normally per- mined by the expected future value of the ceived as a long-term investment, may be underlying financial instruments or their purchased and sold on the same day, and a groups. The most common categories of short-term deposit may be extended for an the derivative securities include warrants, unlimited number of years. Choosing a fi- options, share-index options, interest rate nancial instrument as an investment object future contracts, options on future con- an often considers the investment tracts and a number of other even more duration to a lesser extent, expected return sophisticated financial derivatives. and associated risks being the guiding fac- Thus in view of the broad range of in- tors. Ordinarily, investors show a rather struments available to investors a number low risk tolerance and any riskier instru- of issues acquire a specific importance in- ments are likely to attract the investor’s cluding that of the interaction between the attention only due to their higher return money and capital markets and the possi- rate of the investment. The minimum ac- bility to qualify and quantify the interac- ceptable rate of return is called a required tion. The authors of the paper attempted return (Smith, 1997, p.9). This rate of re- to address the issue by: 1) ascertaining the turn is constantly changing depending on importance of the analysis of the interac- a number of risk factors. The country risk tion between the capital and money mar- that may be defined in terms of the rating

67 assigned to the country, the anticipated macroeconomic indicators. For example, inflation growth, risk level of the invest- material loss may be imminent in the event ment object (government, municipality or where the investor disregards the changes a public company), investment term and a in such factors as interest rates. In 2006, a number of other parameters that affect the number of conservative pension funds re- required rate of return. ported a negative return: Table 1 An investor is in all cases free to choose This was caused by the fact that the ma- an investment object, therefore the level of jor share of the conservative pension funds the required rate of investment on some was represented by debt securities exposed financial instruments will have a direct to interest rate risk, i.e., when interest rates impact upon the preferred rate of return of go up, the value of debt securities decline. other instruments. Eventually the choice In 2004, the first year of the activity of the of financial instruments by investors may Lithuanian pension funds the in- be determined by the ever-changing con- dex marked its historic lows: Fig 1 ditions of financial markets, i.e., which The increase in interest rates observed markets (money, capital or financial deriv- in 2005–2006 caused the significant de- atives) are developing faster in a specific cline in the value of debt securities and af- historic period of time. fected adversely the return of conservative For an investor, specifically the one pension funds. preferring financial instruments of medi- In view of the on-going development um and longer maturity it is of utmost im- on the global scale investors have a choice portance to assess the developments in the not only in terms of a financial market seg- investment environment that are readily ment or financial instruments, he can also expressed by the dynamics of a number of choose a region or a country as an object

Table 1. Return of the Lithuanian conservative pension funds, percent. Company Name of the fund 15-06-2004– 2005 2006 2007 2008 31-12-2004 Aviva Lietuva Europensija 2.44 1.75 0.18 2.89 4.07 Danske Capital Konservatyvaus valdymo investicijų valdymas Danske 1.16 3.08 0.10 1.97 3.79 DnB NORD investicijų DnB NORD pensija 1 valdymas 2.83 2.65 0.41 2.54 2.89 Ergo Lietuva Ergo konservatyvus 2.98 2.70 -0.59 1.19 3.57 Hansa investicijų val- Hansa Pensija 1 dymas 2.64 2.22 -0.64 1.92 0.79 Invalda turto valdymas Konservatyvaus in- vestavimo 459 1.10 1.19 2.20 4.85 Invalda turto valdymas Invalda Nuosaikus ― ― 0.25 2.02 4.95 Parex investicijų valdy- Parex Pensija 1 mas ― -0.69 -0.37 1.46 -2.60 SEB investicijų valdy- SEB Pensija 1 mas 2.31 2.21 0.37 0.60 3.39 Source: Pension and investment funds, 2009.

68 Fig.1. 1 Year LIBOR, proc. Source: 1 Year LIBOR, 2009. MoneyCafe.com of investment. There might be a case that ening of the USD against the German the expected (preferred) return of bonds of mark. The higher interest rates and the one country will affect the rate of return appreciation of the USD was a signal to of the counterpart financial instruments of investors to withdraw their funds invested another country. An even more striking ex- in the West Germany bonds, and the local ample is represented by the growth of the German investors then chose to sell their interest rates on the global scale that start- domestic bonds in exchange for foreign ed in March 1988 basically caused by the debt securities. These developments had a changes of the interest rates in the USA. tremendous impact upon the overall situ- The rise of the interest rates was re- ation in the market. It has been noted that corded simultaneously with the strength- the net acquisitions of German bonds then

Fig. 2. USA prime interest rates, percent. Source: Prime Rate History, 2009. MoneyCafe.com.

69 decreased from DM 35 bn in 1987 to DM overnight is the financial claim of the 2 bn in 1988, and the purchases of foreign shortest term, while the maturity of the ob- bonds increased from DM 25 bn to DM 54 ligation assumed in respect of equities is in- bn (Money and capital markets..., 1989). finitive. The interest rate of a short-term, i.e., The said examples demonstrate ex- an overnight loan and its changes constitute pressly that the investment environment one of the fundamental factors affecting the that encompasses the developments not level and trends of other interest rates. The only in the domestic but also in the foreign increase of the credit price is indicative of states may have a material impact upon the the increase in the demand and/or a fall in financial markets of a specific country, as the supply of financial resources. Analogi- well as its individual segments. cally, the rising equity price index is a clear The objective of the present study as indicator that the equity demand exceeds defined was to analyse whether the capi- the supply, and that investors show clear tal and money markets develop in parallel, preference to the investing in the capital i.e., whether a rise of one market results in markets. And on the contrary – the falling the conditions beneficial for the develop- equity index will indicate a decline in the ment of the other, or the two market com- investment into the capital market. pete by overwhelming each other‘s devel- Theory offers two assumptions under- opment, as well as the factors that affect lying the two patterns in the development the development of the money and capital of the indicators inherent to the two mar- markets and their interaction. kets (money and capital). The first could be To attain the objective as defined above based entirely and solely on the behaviour it was considered necessary to define the of investors. Low interest rates offer the factors indicative of any conditions ben- conditions more favourable for the invest- eficial for the development of the money ment into the capital markets in the expec- market and showing a positive effect of the tation that the low interest rates will stimu- investment environment upon the develop- late a rise in the equity indices. And on the ment of the capital market. Such volume in- contrary – high interest rates accumulate dicators as credit volumes or their increase, all resources in the money market avail- turnover of the securities exchange able for financial investment, which causes are slightly inert and are therefore not suf- a fall in the demand in the capital market ficiently sensitive to reflect the changes in and, as a result, the equity index declines. the investment environment factors. In our This assumption has been supported by view such other factors as the development Ž. Rafael and M. Tvaronavičienė (2005). of the share price index and the overnight In the second case it is assumed that a fa- interbank rate are much more appropriate as vourable macroeconomic environment and they are able to reflect more specifically the the growth of the national economy cause a trends in the markets under consideration. parallel rise of both the equity price indices Since the principal distinction between the and the interest rates. A growing business money market and the capital market is the attracts investment into the capital market maturity of obligations, in this respect the and the low interest rates are a precondition

70 for the investment into the capital markets 2. West European States and Turkey: by absorbing the available capital resources Denmark, Sweden, Switzerland, United whereas under the conditions an Kingdom, European Union and Turkey. entirely opposite trends in the indicators to 3. North American States: USA, Cana- be analysed might be rightfully expected: da and Mexico. declining equity price indices, and rising 4. Countries of the Pacific Ocean re- price of credit resources, i.e., interest rates. gion: Japan, Korea, Australia and New Nevertheless, the interest rate decline mech- Zealand. anism may be way more complicated: on the With a view to disclosing the trends in one hand, under the conditions of economic the capital and money markets the survey downturn the credit demand weakens which covered a period of 15 years (1994–2008). in its turn lowers the credit price, on the oth- In its early stage the survey focused on er hand, the interest rates might be pushed the factors that affect the movements of up due to a higher credit risk characteristic the short-term interest rate and equity pric- of economic recession periods. es then shifted to the examination of the trends of equity prices and interest rates in Factors of the capital and money the countries under consideration. market development The literature on economics fails to offer any unanimous opinion as to which The authors of the survey expanded the components, or factors, of the investment scope of the analysis of the recent trends environment affect the development of the in the development of the indicators con- money and capital markets. In his analysis cerned by going beyond the boundaries of of the capital markets B. J. Foley (1994, Lithuania – the country that due to the pe- p. 1) has distinguished several factors that culiarities of its economy may display some had produced the most tangible effect upon completely uncharacteristic patterns in the the development of the capital markets in trends of the indicator development and the past decades. B.J. Foley classifies the covered some foreign markets that include factors into two major groups – global fac- both the developed and the developing fi- tors and internal market factors. In respect nancial markets. The Lithuanian and the of the global factors the author refers to global markets are closely integrated and the political goal to create preconditions inseparable therefore any insight into the for each and every citizen to become a processes taking place in a specific country co-owner of the companies by splitting necessarily requires an overview of the situ- equities which reduces their nominal value ation evolving in at least the major regions or other similar means. As the factor that of the world. 19 countries were sampled for played a major role in this respect the radi- the purpose of the analysis, therefore, for cal turn of the East European economies the sake of convenience, the countries to be towards market relations that facilitated an analysed were categorised as follows: emergence of a number of new and rapidly 1. East European States: Czech Repub- developing capital markets is considered. lic, Hungary, Poland, Slovak Republic and Also The development of the capital mar- Lithuania.

71 ket was also largely affected by the rising instruments. Finally, the internationalisa- global oil prices that attracted funding for tion of capital markets and the striving the oil extraction businesses in the third of stock exchanges of individual states to world countries and required the creation attract foreign investors led to some liber- of a number of new financial instruments alisation and relief of the requirements and specifically tailored for the purpose. Fur- control exercised and imposed by supervi- theron, the development of the capital sory authorities. market was readily accelerated by a certain Aswath Damodaran (2002, p. 94) pro- revival of the global economy in the eight- posed to classify the risk factors into the ies, the growth in the real income of resi- market and entity-specific risks. The lat- dents and the smoothing of the fluctuation ter, according to Aswath Damodaran in- of interest rates in addition to the slowing clude the reliability of the assumptions inflation. In an exceptional synergistic way underlying investment projects, competi- the development of the capital markets was tion levels, and market risks, according to affected by the parallel development of the the author are characterised by new financial markets and instruments, on exchange changes, government policies, the one hand and the accompanying boost interest rates, inflation and the economic of the computer and communications tech- development indicators. nologies, on the other. M. Schröder (2001, p. 2) in connection The development of the global capi- to his analysis of the capital markets of tal markets was, doubtless, to a certain the Central and Eastern Europe maintains extent affected by the internal changes of that the major factors affecting the devel- the markets concerned including a weak- opment of capital markets include such ening role of intermediaries – highly rated macroeconomic indicators as economic issuers manage to place their securities for development, savings, labour productivity, full subscription without referring to inflation and deficit levels. In his opinion without great difficulties. Or the process an important role for the capital markets referred to as securitisation whereby banks is undoubtedly played by the foreign in- would “package” and transfer to other vestors that affect the demand-supply bal- financial institutions their thus sig- ance. nificantly expanding their crediting possi- Ž. Rafael and M. Tvaronavičienė (2005) bilities. The latter behaviour is widely con- distinguished three groups of conditions sidered to be one of the major reasons that or factors that have an impact upon the caused the current . Further, fluctuations of equity prices. They are the a certain impact was produced by the ex- following: 1) principal conditions for en- tremely rapid increase in the turnovers of trepreneurship or economic conditions; 2) financial derivatives. Although the major principal political conditions; 3) principal part of the increase was generated from social-psychological conditions. Specify- speculative games, that, nevertheless, ing the factors assigned to the individual largely expanded the spectrum of the fi- categories the authors also distinguish the nancial institutions and business volume of the gross national products or

72 the industrial production index. They also upon the securities markets should be relat- consider the of specific shares and its ed to the acceleration of the economic ac- growth rate to be important factors. In this tivity, decrease in the unemployment rates, respect the authors of the present study en- augmentation of interest rates, dynamics tirely agree with the view of Ž. Rafael and of the GDP, inflation and unemployment M.Tvarijonavičienė that one of the most rates. For the examination of the impact of important factors affecting the changes in the macroeconomic environment upon the the share prices is interest rate, as well as securities markets the author has proposed the competing investment instruments such to use the following economic indicators: as government securities, deposits and the real gross domestic product, inflation others. According to the authors, other fac- rate, unemployment rate, external public tors affecting the movement of the share debt, international investment balance, the price indices are inflation, the entry of for- average interest rate of government securi- eign investors into the market, stability of ties, and the interest rate of medium-term the economic system, reliability of the fi- government securities. nancial system, the status of the balance and As contiguous subjects the issues have the currency system. Further, the authors been also addressed in other research pa- define a number of political factors that in- pers (Jasienė and Čapskas, 2008) where clude military actions, presidential decrees, the national interest rates were considered new , state programmes in a number to be affected by such factors as infla- of forms and other similar factors. The most tion rates, the gross domestic product, the important political factors include public country’s rating and the interest rates fixed treasury and monetary policies. Further, in by the European . connection with the definition of the psy- For the purpose of the analysis of the chological factors the authors refer to such study the selection of the indicators able to processes as the feelings of the masses and characterise the impact of the investment the similar. Proceeding from the analysis environment upon the money and capital of the factors the authors have proposed to markets was based on the following two analyse the impact of such factors with ref- considerations. First, the theoretical analy- erence to a number of indicators such as the sis and, second, the system of indicators gross domestic product (at current prices), used for statistical purposes. Thus, the national budget revenues, national budget analysis employed the following indica- expenditures, unemployment rate, foreign tors: gross domestic product, consumer direct investment, inflation rate, the average price index, gross public debt and the interest of securities issued and distributed GDP ratio, foreign direct investment, un- in the market, internal public debt, external employment rate and household savings. public debt, average annual interest in litas Apart from the indicators referred to ear- of term deposits, average annual interest for lier some significant impact, beyond any loans in litas. doubt, is produced by such factors as the I. Pekarskienė (2001) noted that the im- level of the country’s economic develop- pact of the macroeconomic environment ment and the maturity of financial markets,

73 as well as those of the region to which the dium; in respect of the short-term interest country belongs. However, since the im- rate the negative correlation in 4 countries pact of these factors is difficult to assess in was very strong, in 2 countries – strong, in terms of the specific quantitative ratios, the 9 countries – medium and in 2 countries – latter considerations have been left outside weak. the scope of the survey. The comparative weight of the house- The correlation analysis of the influ- hold savings within the household income ence of the indicators as referred to above produced an inverse impact upon the share upon the money and capital markets was prices: the negative correlation in 4 coun- carried out with reference to the statistical tries was very strong, in 4 –of medium data bases and publications of the Bank strength (in the case of four countries such of Lithuania, also the information derived calculations were not done due to the un- from the “Indicator data base” operated availability of the data on the factor); the by the Department of Statistics under the direct impact upon the short-term interest Government of the Republic of Lithuania, rate was concluded as follows: the positive the NASDAQ OMX Vilni- correlation in 3 countries was very strong, us, Organisation for Economic Co-opera- in 3 countries – strong, in 4 – of medium tion and Development Databases, the “Sta- strength, and in 1 country – weak (no data tistics Databases” of the Statistical Office for the factor in respect of 4 countries). of the European Commission (Eurostat). The said factors dominate expressly The authors used the data of 1994–2008 in in terms of the diversified impact upon their analysis although in individual cases the money and capital markets; however, the dynamic time series were shorter, as, the impact of other factors under consid- for example, the earliest indices of the eration within the survey only confirm the Lithuanian stock exchange refer to 1997 possibility for the markets to compete, al- when the computation of such indices was though the impact can be defined as very started. The correlation analysis of the in- specific and requiring a more comprehen- fluence of the indicators upon the money sive and detailed analysis of the impact of and capital markets showed that the factors the individual factors upon the capital and in question affect the capital and money money markets in individual regions and markets differently as a result shaping the countries. related competitive environment different- ly as well. In nearly all countries included Survey of the development pattern into the scope of the survey the gross do- of the money and capital markets mestic product had a positive effect upon The share price and interest rate develop- the capital markets, and a negative impact ment in 1994–2008 in the Eastern Euro- upon the money markets. The impact of the pean countries is most expressly demon- GDP indicator was defined as follows: in strated by the dynamics of the indicators respect of share prices the positive correla- in Hungary: tion in 13 countries was very strong, in 3 countries – strong, and in 1 country – me-

74 Share price Immediate interest rates

Fig. 3. Share prices and overnight interest rates in Hungary: development in 1994-2008 Compiled by the authors of the paper on the basis of the data of the Organisation for Economic Co- operation and Development (OECD.StatExtracts). As evident from Fig. 3 the share price Table 2. The interdependence of the money index and the overnight interest rate move and capital markets in the Eastern European countries in 1994–2008 in the opposite directions, i.e., in this case Country Share price and an overnight the money and capital markets perform as interest rate correlation ratio strong competitors. In Hungary the interest Czech –0.4830 rate and the share price correlation ratio is Hungary –0.7509 0.7509, which indicates the presence of a Poland –0.6846 very strong reverse interdependence. The Slovakia –0.4906 Lithuania 0.02061 correlation ratios of the share prices and interest rates of the entire group of coun- Calculations by the authors on the basis of the data tries are presented in Table 2. derived from the Organisation for Economic Co- operation and Development (OECD.StatExtracts), It is evident that the trends in all Eastern the Bank of Lithuania and the Stock Exchange European countries show a rather similar NASDAQ OMX Vilnius. pattern of the development, i.e., the money and capital markets were developing in Unlike in other Eastern European coun- accordance with a very similar course. In tries the correlation ratio (0.0206) in Lith- this context the only exception is Lithuania uania fails to indicate any interdependence where the correlation ratio (due to the lack between the course of the development of of the data – for a slightly shorter period the money and capital markets, although of time) fails to indicate any dependence in the first half of the surveyd period the between the money and capital markets. 1 Indicators of 1999-2009 used for the purpose of the calculations.

75 Share price Immediate interest rates

Fig. 4. Share price and overnight interest rate development in Lithuania in 1994–2008 Compiled by the authors on the basis of the data of the Bank of Lithuania and the Stock Exchange NASDAQ OMX Vilnius. general trends in Lithuania were identi- overnight interbank interest rates leaped cal to those in other Eastern European and the trends in Lithuania started taking a countries. Nevertheless, in 2006–2008 the different course. The latter development in

Share price Immediate interest rates

Fig. 5. The development of the share prices and the overnight interest rates in euro zone countries in 1994–2008. Compiled by the authors on the basis of the data by the Organisation for Economic Co-operation and Development (OECD.StatExtracts).

76 addition to the shorter period being consid- is rather weak. A slightly stronger relation ered were the main reasons for the absence can be observed in Turkey – the country of the correlation between the short-term which in terms of its economic develop- interest rates and the share prices in Lithu- ment and the trends of the indicators char- ania and in this respect our country differs acterising the money and capital markets is from other countries of the same group. closer to Eastern rather than to the Western In the Western European countries in European countries. the period under investigation the trends In the next group of countries of North were, although less prominent, similar to America region the values of the ratios those in the Eastern European states. Fig.5 of share prices and the overnight interest shows that it is not difficult to notice that in rates were similar to those in the Western the period from 1994 to 1999 characterized European states. by the decreasing rates the share indices were steadily increasing, i.e., up to Table 4. The interdependence of the money and capital markets of North American 1998–1999 the two indicators were devel- countries in 1994–2008 oping in the opposite directions whereas Country Share price and an later the dynamics of the two indicators overnight interest rate was more or less parallel. correlation ratio The share price and interest rates ratios United States of America –02624 Canada –0.3062 of other Western European states and Tur- Mexico –0.5748 key are presented in Table 3. Compiled by the authors on the basis of the data by the Organisation for Economic Co-operation Table 3. The interdependence of the money and capital markets of Western European and Development (OECD.StatExtracts). countries and Turkey in 1994–2008 A slightly stronger negative correlation Country Share price and an overnight between the indicators under analysis can interest rate correlation ratio Denmark 0.3126 be observed in Mexico. The graphic rep- Norway –0.2676 resentation of the indicators concerned of Sweden –0.5048 this country is identical to that of the East- Switzerland –0.1189 ern European countries and Turkey. Mean- United Kingdom –0.1379 while the development of the share prices European Union –0.2534 Turkey –0.6046 and the short-term interest rates in the United States of America is markedly dif- Compiled by the authors on the basis of the data ferent from that in the other countries under by the Organisation for Economic Co-operation and Development (OECD.StatExtracts). analysis . Fig. 6 shows a rather prominent fluctuation of interest rates, such as a fall The data presented in Table 3 show that from 6.4 percent in 2000 to 1.82 percent in the correlation ratios in all countries except 2001, or a fall from 4.24 percent in 2007 to Denmark were negative. In most countries 0.16 percent in 2008. the link between the share price index and More prominent specific trends can be the movement of the overnight interest rate observed in the individual countries of the

77 Share price Immediate interest rates

Fig. 6. Share price and overnight interest rate development in the USA in 1994–2008 Compiled by the authors on the basis of the data by the Organisation for Economic Co-operation and Development (OECD.StatExtracts). last group of the countries included into The share price and interest rate cor- our analysis – those of the Pacific Ocean relation ratios in the selected countries of region. First, Japan – as seen from Fig. 7. the Pacific Ocean region are presented in due to a specifically low overnight inter- Table 5. bank interest rate this indicator shows only a very insignificant fluctuation and the two Table 5. The interdependence of the money indicators under consideration are mov- and capital markets of the Pacific Ocean region states in 1994–2008 ing virtually synchronically, therefore the State Share price and an overnight correlation ratio of 0.51536 recorded in interest rate correlation ratio this country represents the positive depen- Japan 0.51536 dence and some similarity in the trends of Korea –0.2331 the money and capital markets develop- Australia 0.5555 New Zealand 0.35177 ment in the country. In Australia the correlation ratio of Compiled by the authors on the basis of the data the share price index and the interest rate by the Organisation for Economic Co-operation and Development (OECD.StatExtracts. is largely similar (0.5555), however, the graphic representation of the link (Fig. The data presented in Table 5 show 8) is largely different from that of Japan. that the correlation ratio of Korea is some- As seen from the data in the graph, both what closer to that of the USA and Western the share prices and the overnight interest European countries, and that of New Zea- rates in Australia were steadily increasing land – to that of Australia and Japan. and it was only in 2008 that the two indica- To sum up the outcomes of the survey tors sank sharply. it may be concluded that within the period

78 Share price Immediate interest rates Fig. 7. Share price and overnight interest rate development in Japan in 1994–2008. Compiled by the authors on the basis of the data by the Organisation for Economic Co-operation and Development (OECD.StatExtracts. surveyed in most countries of the world and capital markets operate as competitors the overnight interbank interest rate was cannot be ruled out. The analysis that was moving in the direction opposite to the made also showed that in the younger, still trends displayed by the movement of share developing economies the negative corre- indices, i.e., a hypothesis that the money lation ratio between the principal capital

Share price Immediate interest rates

Fig. 8. Share price and overnight interest rate development in Australia in 1994–2008. Compiled by the authors on the basis of the data by the Organisation for Economic Co-operation and Development (OECD.StatExtracts.

79 and money market indicators is, in terms in 2006–2008, and due to a shorter time of its absolute value, higher than that in the series and the unavailability of the data in mature and highly developed countries. Lithuania this correlation dependence was In other words, in more rapidly develop- not established which makes the situation ing countries the competition between the in Lithuania different from that in other capital and money markets is much more Eastern European states; the situation in manifest. . However, the analysis also pro- general is a subject for a more complete duced the evidence that in individual coun- investigation. tries, such as Japan, Australia and New 3. In the Western European states, ex- Zealand the macroeconomic environment cept in Denmark, the trends in the period creates the preconditions for the share under analysis were comparable to those in price and the overnight interest rates to other Eastern European countries, although move in parallel, i.e., actually the money they were not so prominent. A somewhat and capital markets develop by comple- stronger competition between the money menting and supplementing each other. and capital markets can be observed in Turkey which in terms of the nature of its Conclusions economic development and the trends of the indicators characterising the money 1. The correlation analysis carried out by and capital markets is more comparable to the authors of the present paper showed the Eastern rather than to the Western Eu- that a number of factors, such as the gross ropean states. domestic product, consumer price index, 4. In the North American group of coun- the gross public debt in ratio to the gross tries the values of the correlation between domestic product, foreign direct invest- the share prices and the short-term interest ment, unemployment level, household rates were similar to those in the Western savings in most general cases affect the European states. A slightly more prominent capital and money markets in a different negative correlation between the indicators manner and thus produce a diversified ef- concerned is noticed in Mexico in which fect upon the competitive environment. In the general trends of the development of nearly all countries under investigation the the money and capital markets are identi- gross domestic product was producing a cal to those of the Eastern European states positive effect upon the capital markets, and Turkey. Meanwhile the movement of and played the role of a negative factor in the share prices and the short-term inter- the money markets. est rates in the United States of America 2. In Eastern European countries the is conspicuously different from that of the share index and the overnight interest rates other states surveyed. have been developing in expressly oppo- 5. The analysis of the group of countries site directions, i.e., the two markets, the attributed to the Pacific Ocean region shows capital and the money markets operated as that some specific trends are expressly seen fierce competitors. In view of the increase in the individual countries, primarily in Ja- of the short-term interbank interest rates pan in which the capital and money markets

80 have been developing in accordance with a 7. It was concluded that in more rap- somewhat similar course. idly developing countries the competition 6. Within the period under examination between the capital and money markets is (1994–2008) in most countries the short- more prominent. The analysis also showed term interest rates were developing in the that in individual countries, such as Japan, direction opposite to that of share prices; Australia and New Zealand the prevailing on this basis it may be concluded that the macroeconomic environment ensures a hypothesis concerning an assumed compe- parallel development and movement of the tition between the capital and money mar- share prices and the overnight interest rate, kets may not be ruled out entirely. which, as a result, means that the capital and money markets develop as two sys- tems complementing each other.

References

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