| The core theory of economics is pricing theory. The researching focus of economics and economic theory has been developing according to the order of commodity price, capital price and asset price. The stock market in general, is the most visible part of capital market in a country. The underlying asset of many financial derivatives and vehicles is stock. The volatility and development of one country's capital market are affected decidedly by how stock prices go. Therefore, stock pricing and how stock price evolves and are impacted have been taken into account in monetary economics and financial economics. Issues of this strand of research have become most important researching title and studying content.Financial development has raised the significance of capital market in national economy. Asset price movements can affect macroeconomic environment, and changed the monetary transmission mechanism in real activity and macroeconomic area. How the interaction between real stock returns, inflation, and monetary policy has interested monetary and financial economist for a long time. Monetary economists have been interested in the question whether money has any effect on real stock prices, while financial economists have investigates whether equity is a good hedge against inflation. To outline how the monetary transmission mechanism operating through stock prices has become a new area of research, even an important task for theory researchers and policy makers. To make clear the theorem and mechanism of that monetary policy affects asset price, is the prior condition in order to complete this task and above target, and help to explore the implications of asset price volatility for the monetary policy beyond the standard real activity channel by focusing on how monetary policy affects equity price in stock market, which is a most important part of one country's capital market.Movement in the prices of financial assets including stock can influence investment spending and consumption expenditure. Important channels through which monetary policy affects the economy are well known as stock market effects on investment or Tobin's q-theory, firm balance-sheet effects, wealth effects, and liquidity effects, and so on. Monetary policy affects the economy through asset prices besides on debt instruments. Thus, movements in these other assets prices are likely to play an important role in how monetary policy is conducted. Central banks should view prices stability and financial stability as highly complementary and mutually consistent objectives, to be pursued within a unified policy framework. How monetary policy is adjusted is driven by volatility in asset prices. Most of a largeliterature focusing on interaction between asset price and monetary policy has only studied how monetary policy adjusted is driven by movement in the prices of equities, both theoretically and empirically, how movement in the prices of assets affects real activity, and what is the appropriate monetary policy with these effects to play.A large literature about how about how monetary policy affects stock prices has focused on discussing their consequence empirically. While much has been learnt from the above research, many issues have still to be explained, and the theorem and mechanism how monetary policy affects stock prices still remains a fertile area for investigation. As Bernake and Kenneth (2003) emphasizes, there is need for further research into many aspects of interaction between monetary policy and stock prices, which have so fare received relatively little attention. The theorem and mechanism how monetary policy affects stock prices is on such aspect. Previous researchers had suggested that monetary policy works mostly through its indirect effects on asset prices by affecting real variables. Traditional papers indicate that movement in monetary policy have important effects on stock prices by affecting underlying foundational value through influencing real activity. In this paper, we investigate mechanism of monetary policy affecting stock prices,... |
