Effect of Interest Rate Changes on Stock Market Volatility in Congo

Abstract

Purpose: The aim of the study was to assess the effect of interest rate changes on stock market volatility in Congo. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: Changes in interest rates have a notable impact on stock market volatility. When central banks adjust interest rates, it influences investor sentiment and economic forecasts. Typically, an increase in interest rates makes borrowing more expensive, which can dampen corporate profits and economic growth, leading to higher market volatility as investors reassess the value of stocks. Conversely, a decrease in interest rates generally lowers borrowing costs, potentially boosting corporate earnings and economic expansion, which can initially reduce market volatility. However, the long-term effects might differ as lower rates can also lead to overvaluation concerns, eventually increasing volatility. Additionally, interest rate changes signal monetary policy shifts and broader economic conditions, further influencing investor behavior and stock market dynamics. Overall, interest rate fluctuations are a critical factor contributing to stock market volatility through their direct and indirect effects on economic activities and investor perceptions. Implications to Theory, Practice and Policy: Efficient market hypothesis, portfolio theory and behavioral finance theory may be used to anchor future studies on assessing the effect of interest rate changes on stock market volatility in Congo. For practical implications, investors and financial institutions should develop risk management strategies that account for the short-term volatility spikes following interest rate announcements. From a policy perspective, policymakers should consider the lagged effects of interest rate changes when formulating monetary policy to ensure smoother market transitions.