Do emerging financial markets react to monetary policy announcements? Evidence from Poland

Abstract

This paper provides evidence on the short-run reactions of an emerging financial market to monetary policy announcements. An instrumental variable estimation approach is employed, based on the 'identification through heteroscedasticity' technique, to estimate the impact of a change in the official interest rate and its surprise component on asset prices in Poland. The recently introduced methodology controls for possible feedback relationships between financial variables and official interest rate changes. In this analysis, the short-term interest rates respond significantly to official interest rate changes, but neither the long-term interest rates, stock indices, nor foreign exchange rates react to monetary announcements in the expected direction.

Investor response to public news, sentiment and institutional trading in emerging markets: A review

“…Regarding the individual country studies, Serwa (2006) investigates the impact of a change in the official interest rate and its surprise component on asset prices in Poland. He finds that the short-term interest rates did respond significantly to official interest rate changes, but other variables (the long-term interest rates, stock indices and foreign exchange rates) did not react to monetary announcements in the anticipated direction.…”

Public Information Arrival and Investor Reaction During a Period of Institutional Change: An Episode of Early Years of a Newly Independent Central Bank

“…3 See, for example, Cutler, Poterba and Summers (1989), Berry and Howe (1994), Mitchell and Mulherin (1994) and, Andersen, Bollerslev and Cai (2000). 4 To the best of our knowledge, there are two other related studies on Poland (see Serwa (2006) and Rozkrut et al (2007)), however our paper is quite different from them. We explain the differences between our and their contribution in the next sections.…”

“…7 Therefore, we also fill the gap in the literature by providing new evidence on the impact of central bank announcements on foreign exchange market returns and volatility in Poland. 8 The work that is closest to ours is the undertaking by Serwa (2006) who provides evidence on the short-run reactions of the emerging financial market in Poland to domestic central bank monetary policy announcements, measured by changes in the official interest rate. Findings presented by Serwa (2006) show that only the short-term interest rates respond significantly to the official interest changes but not the long-term interest rates, stock indices or foreign exchange rates.…”

“…8 The work that is closest to ours is the undertaking by Serwa (2006) who provides evidence on the short-run reactions of the emerging financial market in Poland to domestic central bank monetary policy announcements, measured by changes in the official interest rate. Findings presented by Serwa (2006) show that only the short-term interest rates respond significantly to the official interest changes but not the long-term interest rates, stock indices or foreign exchange rates. Serwa (2006) concluded that the unexpected monetary policy changes have stronger influence on the money market than the nominal changes in the official interest rate on the days of the monetary policy announcements.…”

“…6 Reactions of investors in emerging financial markets to news may be different than those in industrial countries due to several factors including weak monetary authorities, limited investor confidence, inefficient financial markets and differences in their exchange rate regimes as well as the degree of integration of their markets with the global financial system (for further discussion and empirical evidence, see Serwa (2006), Wongswan (2009) and Hausman and Wongswan (2011)). …”