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Central Bank Credibility’s Effect on Stock Exchange Returns’ Volatility: Evidence from OECD Countries

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  • Ioannis Dokas

    (Department of Economics, Democritus University of Thrace, University Campus, 69100 Komotini, Greece)

  • Georgios Oikonomou

    (Department of Economics, Democritus University of Thrace, University Campus, 69100 Komotini, Greece)

  • Stephanos Papadamou

    (Department of Economics, University of Thessaly, 28 Oktovriou 78, 38333 Volos, Greece)

  • Eleftherios Spyromitros

    (Department of Economics, Democritus University of Thrace, University Campus, 69100 Komotini, Greece)

Abstract

Central bank characteristics are important determinants of stock market returns and their volatility. While the literature has examined the effects of transparency and independence, no research has been conducted so far on the effect of central bank credibility on stock market returns’ volatility. A panel regression using financial and macroeconomic data from 45 OECD member countries over the period of 1998–2022 tested the hypothesis that central bank credibility determines stock exchange returns’ volatility. The results indicated that credibility reduces stock returns’ volatility, remaining robust and statistically significant across models. Economic growth also decreases stock market volatility, while money-market interest rates’ volatility, the stock market’s turnover ratio, and economic/financial crises act as amplifying factors of stock market volatility. All variables, except for economic growth, exhibit unidirectional causality, leading to changes in stock market volatility.

Suggested Citation

  • Ioannis Dokas & Georgios Oikonomou & Stephanos Papadamou & Eleftherios Spyromitros, 2023. "Central Bank Credibility’s Effect on Stock Exchange Returns’ Volatility: Evidence from OECD Countries," Economies, MDPI, vol. 11(10), pages 1-15, October.
    • Handle: RePEc:gam:jecomi:v:11:y:2023:i:10:p:257-:d:1260178
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    References listed on IDEAS

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