Correlation between stock market and monetary market: Empirical study of Hong Kong market

To explore the complicated correlation between stock market and policy embedded monetary market in Hong Kong. Smooth transition regression stochastic volatility model is use to examine the real world time series like Hang Seng Stock Index and Interbank Offered Interest Rate. The results show: nonlinear and negative relationship existed between stock index and interbank offered rate. When transition function in the nonlinear part is active the equity premium will be positive and when it is not active the model is in essence linear and the premium will be negative. Stock index is influenced greater by itself than interest rate, the results presents, evidence of market efficiency in Hong Kong.