The Effect of Central Bank Policy Decisions on Stock Market Returns in Chile
Main Article Content
Keywords
Event study, inflation targeting, monetary policy, stock returns, Chile
Abstract
This paper analyzes the stock-market response to monetary policy decisions made by the Central Bank of Chile. We use a methodology designed for the study of low frequency events and monthly data from September 2001 to December 2013 to estimate the effect of anticipated and unanticipated changes in the Chilean monetary policy interest rate on stock returns. In contrast to the research findings in the literature for the U.S., we find no evidence that monetary surprises affect Chilean stock returns.
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References
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Corbo, V., Landerretche, O., & Schmidt-Hebbel, K. (2001). Assessing inflation targeting after a decade of world experience. International Journal of Finance & Economics, 6(4), pp. 343–368.
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Engle, R. F. & Bollerslev, T. (1986). Modelling the persistence of conditional variances. Econometric Reviews, 5(1), pp. 1–50.
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Guo, H. (2004). Stock prices, firm size, and changes in the federal funds rate target. The Quarterly Review of Economics and Finance, 44, pp. 487–507.
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Jansen, D. W. & Tsai, C. (2010). Monetary policy and stock returns: Financing constraints and asymmetries in bull and bear markets. Journal of Empirical Finance, 17(5), pp. 981–990.
Larraín, M. (2007). Sorpresas de política monetaria y la curva de rendimiento en Chile. Economía Chilena, 10(1), pp. 37–50.
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Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59(2), pp. 347–370.
Rozeff, M. S. (1974). Money and stock prices: Market efficiency and the lag in effect of monetary policy. Journal of Financial Economics, 1(3), pp. 245–302.
Schmidt-Hebbel, K., & Tapia, M. (2002). Inflation targeting in Chile. North American Journal of Economics and Finance, 13(2), pp. 125-146.
Schmidt-Hebbel, K., & Werner, A. (2002). Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate. Economía, 2(2), pp. 31-89.
Thorbecke, W. (1997). On stock market returns and monetary policy. Journal of Finance, 52(2), pp. 635–654.
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), pp. 15–29.
Tsai, C. (2011). The reaction of stock returns to unexpected increases in the federal funds rate target. Journal of Economics and Business, 63(2), pp. 121–138.
Tsay, R. S. (2005). Analysis of financial time series. New Jersey, USA: John Wiley & Sons, Inc.
Bernanke, B. S. & Blinder, A. S. (1992). The Federal funds rate and the channels of monetary transmission. American Economic Review, 82(4), pp. 901–921.
Bernanke, B. S. & Kuttner, K. N. (2005). What explains the stock market’s reaction to Federal Reserve policy? Journal of Finance, 60(3), pp. 1221–1257.
Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31(3), pp. 307–327.
Boschen, J. F. & Mills, L. O. (1995). The relation between narrative and money market indicators of monetary policy. Economic Inquiry, 33(1), pp. 24–44.
Cook, T. & Hahn, T. (1989). The effect of changes in the Federal funds rate target on market interest rates in the 1970s. Journal of Monetary Economics, 24, pp. 331–351.
Corbo, V., Landerretche, O., & Schmidt-Hebbel, K. (2001). Assessing inflation targeting after a decade of world experience. International Journal of Finance & Economics, 6(4), pp. 343–368.
Ehrmann, M. & Fratzscher, M. (2004). Taking stock: Monetary policy transmission to equity markets. Journal of Money, Credit and Banking, 36(4), pp. 719–737.
Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), pp. 987–1007.
Engle, R. F. & Bollerslev, T. (1986). Modelling the persistence of conditional variances. Econometric Reviews, 5(1), pp. 1–50.
Engle, R. F., Lilien, D. M., & Robins, R. P. (1987). Estimating time varying risk premia in the term structure: The Arch-M model. Econometrica, 55(2), pp. 391–407.
Friedman, M. & Schwartz, A. (1963). A monetary history of the United States, 1867-1960. New Jersey, USA: Princeton University Press.
Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. Journal of Finance, 48(5), pp. 1779–1801.
Guo, H. (2004). Stock prices, firm size, and changes in the federal funds rate target. The Quarterly Review of Economics and Finance, 44, pp. 487–507.
Gurkaynak, R. S., Sack, B., & Swanson, E. T. (2005). Do actions speak louder than words? The response of asset prices to monetary policy actions and statements. International Journal of Central Banking, 1(1), pp. 55–93.
Hamilton, J. D. (1994). Time series analysis. New Jersey, USA: Princeton University Press.
Jansen, D. W. & Tsai, C. (2010). Monetary policy and stock returns: Financing constraints and asymmetries in bull and bear markets. Journal of Empirical Finance, 17(5), pp. 981–990.
Larraín, M. (2007). Sorpresas de política monetaria y la curva de rendimiento en Chile. Economía Chilena, 10(1), pp. 37–50.
Muñoz, J. A., Recabal, C. A., & Acuña, A. A. (2007). La política monetaria y su impacto sobre los retornos reales del mercado bursátil chileno. Horizontes Empresariales, 6(2), pp. 9–29.
Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59(2), pp. 347–370.
Rozeff, M. S. (1974). Money and stock prices: Market efficiency and the lag in effect of monetary policy. Journal of Financial Economics, 1(3), pp. 245–302.
Schmidt-Hebbel, K., & Tapia, M. (2002). Inflation targeting in Chile. North American Journal of Economics and Finance, 13(2), pp. 125-146.
Schmidt-Hebbel, K., & Werner, A. (2002). Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate. Economía, 2(2), pp. 31-89.
Thorbecke, W. (1997). On stock market returns and monetary policy. Journal of Finance, 52(2), pp. 635–654.
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), pp. 15–29.
Tsai, C. (2011). The reaction of stock returns to unexpected increases in the federal funds rate target. Journal of Economics and Business, 63(2), pp. 121–138.
Tsay, R. S. (2005). Analysis of financial time series. New Jersey, USA: John Wiley & Sons, Inc.