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Asymmetric effects of monetary policy on an emerging stock market

Author

Listed:
  • Guowen Han
  • Yongjin Wu
  • Warren Young

Abstract

This paper examines the relationship between monetary policy and the stock market based on data from two stock indices in China - the Shanghai Composite Index and Shenzhen Composite Index. The result shows only unanticipated monetary policy can affect the stock return significantly. Based on anticipated effects, we examine whether monetary policy has asymmetric effects on the stock market by using a linear model with a dummy variable and a modified Markov-switching model respectively. Our empirical results support existing evidence for developed markets, suggesting that monetary policy has a significant impact on stock returns in bear-market periods, whereas the impact is weak and insignificant in bull-market periods. Given this, we surmise that investor sentiments and borrowing constraints are the main causes of the asymmetric effects found.

Suggested Citation

  • Guowen Han & Yongjin Wu & Warren Young, 2014. "Asymmetric effects of monetary policy on an emerging stock market," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 7(3), pages 192-206.
    • Handle: RePEc:ids:ijmefi:v:7:y:2014:i:3:p:192-206
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    Citations

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    Cited by:

    1. Andrew Phiri, 2018. "Has the South African Reserve Bank responded to equity returns since the sub-prime crisis? An asymmetric convergence approach," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 10(3), pages 205-225.
    2. Phiri, Andrew, 2017. "Has the South African Reserve Bank responded to equity prices since the sub-prime crisis? An asymmetric convergence approach," MPRA Paper 76542, University Library of Munich, Germany.
    3. Ijaz Ur Rehman & Nurul Shahnaz Mahdzan & Rozaimah Zainudin, 2016. "Is the relationship between macroeconomy and stock market liquidity mutually reinforcing? Evidence from an emerging market," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 9(3), pages 294-316.
    4. Xuan Vinh Vo & Hong Thu Bui, 2016. "Liquidity, liquidity risk and stock returns: evidence from Vietnam," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 9(1), pages 67-89.
    5. Manuel Joaquim Da Natividade Silva & Gutemberg Hespanha Brasil & Ricardo Ramalhete Moreira, 2016. "Dynamic relations of the inertia of monetary policy: application to the Brazilian case by a Kalman approach," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 9(1), pages 1-24.
    6. Rob Kim Marjerison & Chungil Chae & Shitong Li, 2021. "Investor Activity in Chinese Financial Institutions: A Precursor to Economic Sustainability," Sustainability, MDPI, vol. 13(21), pages 1-17, November.

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