Trading Behaviour and Monetary Policy News

Abstract

This paper examines the patterns of trading behaviour, in the period surrounding monetary policy announcements. Utilizing a high-frequency data-set, with broker identifiers enabling classification of trades executed through institutional and retail brokers, I investigate all trades submitted on the ASX over the period Dec 2007-Dec 2014. I identify a rapid, asymmetric, price adjustment to the announcement, which is larger for reductions in the target rate, and is accompanied by a sharp increase in market activity. Institutional brokers tend to execute trades more quickly following the announcement, and target more liquid large-cap stocks. Trades executed through institutional brokers appear to be more profitable, although profits are concentrated in buy trades. The evidence supports the notion that institutional investors have an advantage in processing the news resulting from target rate decisions.

Keywords: Trading behaviour, Stock market, Institutional brokers, Retail brokers, Monetary policy, RBA

JEL Classification: G1, G10, G12, G14