Impact of Monetary Policy on the Volatility of Stock Market in Pakistan

Qayyum, Abdul and Anwar, Saba (2011): Impact of Monetary Policy on the Volatility of Stock Market in Pakistan. Published in: International Journal of Business and Social Science , Vol. 2, No. 11 (22 May 2011): pp. 18-24.

Abstract

This paper addresses the linkages between the monetary policy and the stock market in Pakistan. The estimation technique employed includes Engle Granger two step procedure and the bivariate EGARCH method. The results indicate that any change in the monetary policy stance have a significant impact on the volatility of the stock market. Thus contributing to the ongoing debate in the monetary policy rule literature regarding the proactive and reactive approach.

• Item Type: MPRA Paper
• Language: English
• Keywords: Interest Rate, Stock Market, Monetary Policy, EGARCH, Pakistan
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

References

Bernanke, B. and Kuttner, N. (2005) What Explains the Stock Market’s Reaction to the Federal Reserve Policy? The Journal of Finance, Vol. LX, 1221-1257

Bollerslev, T. (1986) Generalized Autoregressive Conditional Heteroscedasticity, Journal of Econometrics, 31

Cassola, N. and Morana, C. (2004) Monetary Policy nad Stock Market in the Euro Area. Jouirnal of Policy Modelling 26, 387 – 399.

Engle, R. F., and Granger, C. W. (1987) Cointegration and Error Correction: Representation, Estimating and Testing, Econometrica, 55, 251, 76

Engle, R. F. (1982) Autoregressive Conditional Heteroskedasticity and Estimates of the Variance of UK Inflation, Econometrica, Vol. 50, 987-1008

Fair, Ray C. (2002) Events that Shook the Market. Journal of Business, 75,713 – 731.

Goodhart, C., and Hofmann, B. (2000) Financial Variables and the conduct of Monetary Policy”, Sveriges Riskbank Working Paper, No. 12.

Hussain, F. and Qayyum, A. (2007), Stock Market Liberalisations: The South Asian Experience, Journal of Management Science, 1:1

Ioannidis, C. and Kontonikas, A. (2006) Monetary Policy and the Stock Market: Some International Evidence, University of Glasgow Working Paper, No. 2006_12.

Janjua, Asharf (2003), History of the State Bank of Pakistan 1977-1988, SBP.

Janjua, Asharf (2004), History of the State Bank of Pakistan 1988-2003, SBP.

Nelson, D. B. (1991) Conditional Heteroscedasticity in Asset Returns: A New Approach, Econometrica, Vol. 59, 347- 370 Niazi, A. K. (2005) Monetary Policy in Historical Perspective (Pakistan Experience, 1978-2005),Pakistan Business Review, Vol. 8 (3), 3-43.

Niazi, A. K. (2007) Monetary Policy in Historical Perspective (Pakistan Experience, 1970- 1978), Pakistan Business Review, Vol. 8 (4), 3-40.

Patelis, Alex. D. (1997) Stock Return Predictability and the Role of Monetary Policy, The Journal of Finance, Vol