Response of Stock Markets to Monetary Policy: An Asian Stock Market Perspective

23 Pages Posted: 16 Sep 2014

See all articles by Naoyuki Yoshino

Naoyuki Yoshino

Asian Development Bank Institute

Farhad Taghizadeh Hesary

Waseda University

Ali Hassanzadeh

Monetary and Banking Research Institute (MBRI)

Ahmad Danu Prasetyo

Bandung Institute of Technology - School of Business and Management

Date Written: September 5, 2014

Abstract

We estimate the response of Asian stock market prices to exogenous monetary policy shocks using a vector error correction model. In our paper, monetary policy transmits to stock market price through three routes: money by itself, exchange rate, and inflation. Our result points to the fact that stock prices increase persistently in response to an exogenous easing monetary policy. Variance deposition results show that, after 10 periods, the forecast error variance of beyond 53% of the Tehran Stock Exchange Price Index (TEPIX) can be explained by exogenous shocks to the US dollar-Iranian rial exchange rate, while this ratio for exogenous shocks to Iranian real gross domestic product was only 17%. We argue that such evidence can be accounted for by an endogenous response of the stock prices to the monetary policy shocks.

Keywords: Asian stock market, monetary policy shocks, vector error correction model

JEL Classification: E44, G10, G12

Suggested Citation

Yoshino, Naoyuki and Taghizadeh Hesary, Farhad and Hassanzadeh, Ali and Prasetyo, Ahmad Danu, Response of Stock Markets to Monetary Policy: An Asian Stock Market Perspective (September 5, 2014). ADBI Working Paper No. 497. Available at SSRN: https://ssrn.com/abstract=2492046 or http://dx.doi.org/10.2139/ssrn.2492046

Naoyuki Yoshino (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

Farhad Taghizadeh Hesary

Waseda University ( email )

1-6-1 Nishi-Waseda,
Shinjuku, Tokyo 169-8050
Japan

Ali Hassanzadeh

Monetary and Banking Research Institute (MBRI) ( email )

No 10. Africa Ave.
Arzhantin Sq
Tehran
Iran

Ahmad Danu Prasetyo

Bandung Institute of Technology - School of Business and Management ( email )

10 Ganesha Street
Gedung SBM-ITB
Bandung, West Java 40132
Indonesia

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