Reactions of Stock Prices to Changes in Exchange Rate and Monetary Policy Rate of Central Banking System: Symmetry or Asymmetry

Abstract

This study examines the reactions of stock prices to variations in the monetary policy rate of the central banks and exchange rate shock, which is if the responses are similar or differ in a comparative analysis between developed and emerging stock markets. Data were obtained on daily stock market prices, exchange rates, and variations in policy rate. The panel non-linear autoregressive distributed lag (NARDL) estimation method was utilized for this study. The NARDL showed the existence of a significant asymmetric long-run link between stock market price, exchange rate, and variation in monetary policy rate variables. For developing countries, the long-run results show that a percentage rise in the currency rate stimulated a 0.596% increase in the price of stock while it resulted in a 0.574% drop in the prices of stock. The same results were obtained for the short-run analysis. Also, the results show that a positive shock to the policy rate led to a 0.26% drop in the price of stock in the long term while it induced a 0.35% rise in the prices of stock. These estimates are similar to those obtained for developed economies. By and large, the findings imply that variations in the currency and monetary policy rate of the central banks have significant implications for stock market prices. There is a need for central monetary authorities to base effective regulations of exchange and monetary policy rates on market mechanisms while stock market investors are advised to frequently study the behavior of the two variables when dealing with the stock market.