Title: Asymmetric effects of monetary policy on an emerging stock market

Authors: Guowen Han; Yongjin Wu; Warren Young

Addresses: Economics and Management School, Wuhan University, Wuhan 430072, China ' Economics and Management School, Wuhan University, Wuhan 430072, China ' Department of Economics, Bar Ilan University, Ramat Gan 52900, Israel

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.

Keywords: monetary policy; Markov switching model; anticipated effects; asymmetric effects; emerging markets; stock markets; China; stock returns; bear markets; bull markets; investor sentiments; borrowing constraints.

DOI: 10.1504/IJMEF.2014.066485

International Journal of Monetary Economics and Finance, 2014 Vol.7 No.3, pp.192 - 206

Received: 07 Mar 2014
Accepted: 12 Jul 2014
Published online: 22 Dec 2014 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article