Stock Market Reaction to Policy Intervention
42 Pages Posted: 19 Nov 2015
Date Written: November 18, 2015
Abstract
We analyze stock price reactions to the announcements of monetary and fiscal policy actions in twelve stock exchanges worldwide. While previous studies analyzed the effect of policy interventions focusing on monetary policy (e.g. Ricci, 2015) or concentrated on a specific type of companies (e.g. banks), our paper focuses on the reaction of stock indices representing the whole stock exchange and indices representing various industries. By estimating abnormal stock reactions around the announcement date of a wide range of policy actions between the 1st June 2007 and 30th June 2012, we show that: 1) Stock industry-indices react to policy interventions in a different manner from that of the broad stock index suggesting the existence of portfolio diversification opportunities; 2) Expansionary monetary actions have a negative effect on stock prices, when sector indices are taken into account; 3) Stock return reacts negatively to restriction measures for general and non-financial sector indices; 4) There is a stronger price reaction to expansionary measures during the first (and the hardest) stage of financial crisis (1st June 2007-14th September 2008).
Keywords: Fiscal stimulus, Financial crisis, Monetary policy, Asset prices, Monetary transmission
JEL Classification: E62; G10; G14; G18
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