The Interactions among Bond Market, Stock Market, Inflation Rate and Interest Rate in the United States

In this paper, we use Unit Root Test, VAR model and Impulse Responses to examine the relationship between monthly return of S&P500 Index, investment grade bonds, high yield bonds, government bonds, and CPI. By leveraging AIC, BIC, and HQC method, we choose the best lag period. Then we divide whole sample interval into “Rate-Hike Period” and “Rate-Cut Period” to see how they affect each other. In the full time interval, we find when stock market fell two periods ago, current investment grade bond market would surge. Besides, the situation is the same when it comes to high yield bond market. This implies bond market might me overreacted sometimes. In terms of “Rate-Cut Period,” we might find overheated economy by examining either investment grade bond market or government bond market. In addition to that, in this time frame we also find that each sub-markets of bond markets interact with each other. When it comes to “Rate-Hike Period,” we find that the importance of CPI increase largely. That is, how CPI influences other markets is stronger in this period than other period.