Ontologies For Transmission Mechanism From Interest Rate To Equity Price

After the credit crisis, nearly all the central banks have cut interest rates to stimulate economies, in recent months, we have seen central banks in many countries pursuing a strategy of raising interest rates in order to prevent an increase in inflation arising. lJsually, these monetary polices will cause a drastic fluctuation in stock market, since the stock market is an important channel from monetary police to real economy, interest rate is a universal monetary tool and is regarded as a monetary police indicator.It is crucial to understand how interest rate affects equity price both for central bank and investors in stock market. Adjustment of interest rate can change money supply immediately to affect equity market in short term and effect real economy which feedback to equity market in long term, so central banks need a model to simulate monetary police transmission, by the analog central banks can assessment the effects of interest rate adjustment and carry out appropriate adjustment. Investors need a system which can calculate how the interest rate adjustment affects equities in market and give market operations promptly.The transmission mechanism from interest rate adjustment to equity price fluctuation is complicated, it may transform from foreign exchange market, bond market, durable goods consumption market, fixed assets investment and others. In order to implement functions above, by reducing human information processing limitations and cognitive biases, an ontology based framework, for investigating the transformation mechanism from interest rate to equity market is proposed.But these classical theories are incomplete in several important ways. Ben S. Bernanke put forward credit channel in 1995, he described two possible linkage, balance sheet channel and bank lending channel, so in this paper these linkage is analyzed by three ontologies, static ontology, dynamic ontology, and social ontology.Static ontology describes the subjects and their attributes in the transmission mechanism. Dynamic ontology represents the dynamic aspect of how adjustment interest rates transmit to equity price step by step. The social ontology represents the knowledge about the social structure of subjects in the transmission process. The ontologies are united in the Ontology Web Language framework which is machine readable.After the establish of ontologies, a case the adjustment of interest rate by People's Bank of China in 2004 is offered to demonstrate the transduction mechanism proposed. Contrasted with this case, the adjustment implemented by Federal Reserve Board in the same period is analyzed. The comparison shows how interest rate adjustment transforms in different economy systems.The major contributions of this research is that the ontology helps understand the knowledge about interest rate adjustment transmission to equity market, helps to build models to predict equity fluctuate against monetary police.