The response of global equity indexes to U.S. monetary policy announcements

Abstract

This paper documents the impact of U.S. monetary policy announcement surprises on equity indexes in sixteen countries, covering both developed and emerging economies. Using high-frequency intraday data, I find a large and significant response of Asian, European, and Latin American equity indexes to U.S. monetary policy announcement surprises at short time horizons. In this paper, I use two proxies for monetary policy surprises: a surprise change to the current target federal funds rate, and a revision to the path of future monetary policy (Gürkaynak, Sack, and Swanson (2004)). Consistent with results for the U.S. equity market, this paper finds that in most cases foreign equity indexes react only to a surprise change in the current target rate. On average, a hypothetical unanticipated 25-basis-point cut in the federal funds target rate is associated with a ½ to 2½ percent increase in foreign equity indexes. The variation of the response across countries appears to be more related to the degree of financial integration with the United States than it is to trade linkages with the United States or the degree of exchange rate flexibility.

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.…”

“…In order to overcome potential problems of heteroskedasticity and serial correlation, we employ the Newey-West (1987) estimator to the covariance matrix. 1993-2001 1994-2002 1995-2003 1996-2004 1997-2005 1998-2006 1999-2007 2000-2008 2001-2009 2002-2010 2003- 1993-199919941995199619971998-20041999-2006-2009 1993-1997 1994-1998 1995-1999 1996-2000 1997-2001 1998-2002 1999-2003 2000-2004 2001-2005 2002-2006 In total, we allowed a maximum number of five breaks based on the sample size; we also employed a 15% trimming and 5% significance level. As described in Section 3, we apply the Global L Breaks versus None approach, using an F statistic and double maximum test, which involves maximization both for a given number of breaks l across various values of the test statistic for l. The hypothesis can be summarized as H 0 , no structural breaks, and H A , alternative number of unknown breaks up to an upper bound (m = 5).…”

Measuring Systemic Risk Contribution of International Mutual Funds

“…7 See Kuttner (2001) for the decomposition of the monetary policy change into expected and unexpected components. The methods are relatively practical and efficient in capturing the market's response to monetary policy; see also Bernanke and Kuttner (2005) and Wongswan (2009).…”

U.S. Monetary Policy Surprises and Mortgage Rates

“…As a consequence, FOMC statements disseminate additional information on the future path of monetary policy beyond the information on the target federal funds rate. 1 This article extends the recent central bank communication literature on other U.S. financial markets (Bernanke, Reinhart and Sack 2004, Gürkaynak, Sack and Swanson 2005, Wang, Yang and Wu 2006, Wang, Yang and Simpson 2008, Wongswan 2009, Hausman and Wongswan 2011, Xu and Yang 2011 and uses two factors to better measure U.S. monetary policy surprises. We find evidence that mortgage rates react to both the target and path factors in this study.…”