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.

Public information arrival and investor reaction during a period of institutional change: An episode of early years of a newly independent central bank

“…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)). …”

“…They found that the verbal comments of policy makers in the Czech Republic, Hungary, and Poland influenced behavior of the currency market but that this effect differed 7 See, among others, Ganapolsky and Schmuckler (2001), Kaminsky and Schmukler (2002), Korczak and Bohl (2005), Nikkinen, Omran, Sahlström and Äijö (2006), Robitaille and Roush (2006), Wongswan (2009), Hanousek, Kočenda and Kutan (2009). There is only a limited number of papers concerning other market segments (see e.g.…”

When No News is Good News The Decrease in Investor Fear after the FOMC Announcement

“…The importance of the news revealed in the FOMC meeting can be even further highlighted by the impact it has on foreign markets (see e.g. Wongswan, 2009;Hausman and Wongswan, 2011;and Lucca and Moench, 2014), and different asset classes (see e.g. Basistha and Kurov, 2014, for the impact of FOMC announcements on energy prices; and Andersen et al, 2007, for the impact on international equity, bond and foreign exchange markets).…”

The role of data revisions and disagreement in professional forecasts

“…A large body of literature examines responses of financial market prices to the surprise component of major macroeconomic announcements and monetary policy releases (Andersson, Overby, and Sebestyén, 2009). Several studies focus on the impact of monetary policy surprises on interest rates (Valente, 2009;Das, 2002;Ederington and Lee, 1993;Doukas and Melhem, 1986;Urich and Wachtel, 1984;Grossman, 1981) and more recently on global equity indexes (e.g., Wongswan, 2009), bond and stock markets (Basistha and Kurov, 2008;Andersson, 2007;Beber and Brandt, 2006;Deaves, 1990), and foreign exchange rates (Andersen, Bollerslev, Diebold, and Vega, 2007;Faust, Rogers, Wang, and Wright, 2007;Andersen, Bollerslev, Diebold, and Vega, 2003).…”