Federal reserve's policy, global equity markets, and the local monetary policy stance

Abstract

This paper examines the extent to which local monetary policy stance determines the strength of US monetary policy international transmission to global equities. Using a sample of 35 countries, we document that US monetary policy surprises exert significant inverse effects on global equity returns. Our results suggest that countries whose policy rates are brought into line with that of the US are less sensitive to US monetary policy shocks only when they have a high and intermediate level of cross-border financial linkages, and only when they have a low and intermediate level of exchange rate volatility.

Do foreign investors insulate firms from local shocks? Evidence from the response of investable firms to monetary policy

“…15 Among the significant responses, an unexpected one percent increase in the Fed funds rate leads to a decline of about 0.54% in the Jordanian stock market to a high and significant 1.57% for Venezuela. These responses are broadly in line with those of the emerging stock markets documented in previous studies (Chortareas and Noikokyris, 2017;Laeven and Tong, 2012;Hausman and Wongswan, 2011;Ehrmann and Fratzscher, 2009), although they are based on different methodologies and time periods.…”

“…This difference between our finding and that of Cetorelli and Goldberg (2012) might, in part, be a reflection of global banks' ability to tap into their cross-border internal capital markets. A third strand of this literature finds that emerging stock markets react significantly to U.S. monetary policy (Bailey, 1990;Ehrmann and Fratzscher, 2009;Wongswan, 2009;Hausman and Wongswan, 2011;Laeven and Tong, 2012;and Chortareas and Noikokyris, 2017). Our work complements theirs by showing that their results do not arise solely from investable stocks, as might be expected, but also from non-investable stocks.…”

Latin American stock market dynamics and comovement

“…Is there a clear lead-lag relationship? Such analyses will complement findings by studies that analyse the impacts of U.S. monetary policy on foreign equities (see, e.g., Wongswan, 2009;Chortareas & Noikokyris, 2017;Du, 2017), which there is a statistically significant effect of U.S. monetary policy surprises on foreign equity indexes, but then explain only a small percentage of the foreign equity price movements.…”

The impact of COVID-19 pandemic on transmission of monetary policy to financial markets

“…As a starting point, this analysis estimates the effects of monetary policy on financial market indicators. It draws on the broadest range of literature (Alexander & Kaeck, 2008;Chortareas & Noikokyris, 2017;Kuttner, 2001;Sun, 2020) to regress the changes in financial markets on policy rate changes (conventional monetary policy) and the unconventional monetary policy announcement variable.…”

“…As policy rates usually remain unchanged in many countries for a long time, the data on policy rate changes contain several zero values. Therefore, we use the eventstudy method, consistent with a rich body of recent literature (Chortareas & Noikokyris, 2017;Kuttner, 2001;Sun, 2020). The eventanalysis method makes it possible to test the transmission of monetary policy adjustments to financial markets separately, reducing interference from other information.…”