Monetary Policy Announcements, Communication, and Stock Market Liquidity

24 Pages Posted: 9 Sep 2016

See all articles by Jieun Lee

Jieun Lee

The Bank of Korea; Bank of Korea - Economic Research Institute

Doojin Ryu

Sungkyunkwan University

Ali M. Kutan

Southern Illinois University at Edwardsville

Date Written: September 2016

Abstract

Using the high‐quality intraday transaction data from 2001–2012, we investigate changes in stock market liquidity in response to the monetary policy announcements of the Bank of Korea (BOK). We find that liquidity impairment associated with informed trading occurs prior to the announcements but it disappears subsequent to the global financial crisis. In addition, liquidity impairment appears to become more severe with insufficient experts' predictability and accuracy rather than with policy rate change itself and unscheduled announcements. Finally, the Federal Open Market Committee (FOMC) announcements, changes in the Volatility Index (VIX), and trading by foreign investors play a limited role in explaining stock market liquidity changes. Overall, results indicate that central bank communication plays a significant role in reducing liquidity impairment by enhancing the predictability of policy actions, and therefore, mitigating information asymmetry.

JEL Classification: E52, G14, G18

Suggested Citation

Lee, Jieun and Ryu, Doojin and Kutan, Ali M., Monetary Policy Announcements, Communication, and Stock Market Liquidity (September 2016). Australian Economic Papers, Vol. 55, Issue 3, pp. 227-250, 2016, Available at SSRN: https://ssrn.com/abstract=2836736 or http://dx.doi.org/10.1111/1467-8454.12069

Jieun Lee (Contact Author)

The Bank of Korea ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794, 100-794
Korea Republic of (South Korea)
82-2-759-5470 (Phone)

Bank of Korea - Economic Research Institute ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794
Korea Republic of (South Korea)

Doojin Ryu

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

Ali M. Kutan

Southern Illinois University at Edwardsville ( email )

Department of Economics and Finance AH-3141
Edwardsville, IL 62026-1102
United States
618-650-3473 (Phone)
618-650-3047 (Fax)

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