Monetary Shocks And Asymmetric Effect In Stock Market

The performance of financial market under the macro-economy policies is one of the most important fields in the studies of Economy and Finance. Since the financial crisis in2008, for those emerging markets experiencing high-speed growth in the past several years, monetary policies have been heavily used to achieve the desired policy goals. In the meanwhile, due to their inherent characteristics and drawbacks, stock markets in emerging economies are more easily affected by the changes of monetary policies than before. In China, changes of monetary policies will not only affect the stock market, but the performance on it may even be conflicting with the traditional economic and financial theory. Based on this, the studies on monetary shocks and the effect on stock market have great meaning and will provide motivation on other studies about emerging markets.This paper firstly reviews the literatures on the parts of influencing results, channels, mediators and the methodology. The evidence through current literatures give a growing belief that it is reasonable to accept that monetary shocks will affect the stock market and interest rate, required reserve rate, money supply and exchange rate are the most important factors. Meanwhile, the shocks affect the stock market through the "Wealth Effect","Liquidity Effect" and "Market Channel Effect", are different from the traditional channel just based on interest rate. On methodology, we find that the Event Study Method is preferred to the discrete variables and Time Series Analysis is a better choice to the continuous ones.Based on some assumptions and literatures, this paper follows expected utility theory, asset pricing theory and risk theory to confirm that "Wealth Effect" and "Liquidity Effect" from monetary shocks have direct impact on the theoretical pricing of the security. Especially, changing of risk aversion of the investors is the most important factor. Meanwhile, the result of the theoretical analyses shows that it is reasonable to use VAR model and their variants in this study.In empirical analyses, this paper makes some tests to the sample and the estimated model with Eviews5.0and Gauss9.0. The Event Study Method (ESM) is used to investigate the effect from interest rate and required reserve rate. The MSVAR-EGARCH model is used for the effect from money supply and exchange rate. The results show that monetary shocks originating from the changes of policy in China have asymmetric effects on stock market in different market regimesThe main following conclusions could be made from this paper. First,"Wealth effect" and "Liquidity Effect" from the changing of monetary policy have great impact on the theoretical asset pricing, then influence the volatility on the stock market. Second, reserve rate shocks and interest rate shocks exhibit asymmetric effects on the stock market and their impacts depend on the market regimes. In bull market, reserve rate shocks can decrease the volatility, but the interest rate shocks just have effect in short period. In bear market, both of them can increase the volatility on stock market. Third, money supply and exchange rate shocks have robust impacts on the stock market. There is a significantly positive relationship between the changes of these two shocks and the rate of return of the stock market. Liquidity and asset values always influence the volatility of stock markets in China. At last, following the conclusions, this paper provide the policy suggestions on the aspect of establishing the channels of information announcement, improving the policies cooperation and increasing the investors education.