Monetary Policy, Exchange Rate and Asian Stock Markets

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Introduction Methodology Results Robustness ConclusionMonetary Policy, Exchange Rate andAsian Stock MarketsTim LeelahaphanThe University of Warwick, UK5 November 2009Bank of Thailand Research Workshop20 October 2009Internal Workshop, The University of Warwick6 August 2009Singapore Economic Review Conference 2009Tim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsIntroduction Methodology Results Robustness ConclusionExamine the effect of monetary policy and exchange rateon stock pricesEmploy a Bayesian structural vector autoregression modeland impose sign restrictionsSimultaneously and uniquely identify contractionarymonetary policy shocks and depreciation shocks in anintegrated frameworkConsider standard VAR analyses including impulseresponses and variance decompositionCover Malaysia, South Korea and Thailand stock markets,1989-2008Tim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsIntroduction Methodology Results Robustness Conclusion10 minutes Introduction and Econometric Methodology15 minutes Results and Robustness5 minutes ConclusionComments and QuestionsTim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsIntroduction Methodology Results Robustness ConclusionMP/Stock Prices ER/Stock Prices Motivation ObjectivesMonetary Policy and Stock PricesInterest rates are important determinant of stock pricesAffect both the current and the expected future realinterest rateChanges in expected future interest rate serving as adiscount rate (direct link between MP and the stock market)Changes in all factors affecting aggregate demand, thepath of profit and the expected dividends (indirect linkbetween MP and the stock market)Tim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsIntroduction Methodology Results Robustness ConclusionMP/Stock Prices ER/Stock Prices Motivation ObjectivesExchange Rate and Stock PricesER changes could affect the competitiveness ofmultinational firms (goods market hypothesis andtraditional approach)The value of an exporting firm would increase, following itsdomestic currency depreciationA fall in firm’s stock prices due to a depreciation, if lots ofimported inputs are used in the productionMovements of ER have effect on firm’s future payables (orreceivables) that are denominated in foreign currencyCompare to MP/stock prices, lesser attention has been paidto ER/stock pricesTim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsIntroduction Methodology Results Robustness ConclusionMP/Stock Prices ER/Stock Prices Motivation ObjectivesMotivationAfter the 1997 Asian financial crisis, ER/stock prices hasreceived higher attention due to turmoil in both marketsJul-Sep 97, ringgit (-37.4%), stock market (-31.4%)End of 97, Korean won (-150%), stock market (-50%)Begin of 98, Thai baht (lowest point), stock market (-75%)The primary reason for the Asian financial crisis is attributableto an inappropriate mixture of policies (Rajan, Thangaveluand Parinduri (2008))ER issues and MP relevant to Asia, especially those relatingto financial issues and asset prices, are in focus ofeconomists and market participantsWhether MP should seek to promote asset price stabilityTim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsIntroduction Methodology Results Robustness ConclusionMP/Stock Prices ER/Stock Prices Motivation ObjectivesObjectivesTo examine if there is difference in the influence of the MPactions and of ER developments on the stock market (thesystematic feature in terms of persistence of the impact)To assess if ER has also played important role in driving thestock market, in addition to MPTo examine and compare the extent to which MP and ERis responsible for the movements in Asian stock pricesTim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsIntroduction Methodology Results Robustness ConclusionSign Restrictions Identification SpecificationSign Restrictions ApproachTo differentiate monetary policy shocks and exchange rateshocks in the dataDeveloped by Canova and de Nicolo (2002), Uhlig (2005)and Mountford and Uhlig (2005)Justify if the signs of the corresponding impulse responsesare accepted by priori consensual considerations regardingthe effects of MP shocks and ER shocks on keymacroeconomic variablesLeave the impact of these two shocks on real stock pricesunrestrictedTim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsIntroduction Methodology Results Robustness ConclusionSign Restrictions Identification SpecificationAdvantages of Sign Restrictions ApproachRequire only a minimal set of economically meaningfulrestrictions for identifying MP shocks and ER shocksMake restrictions which are often used implicitly and are inline with the conventional considerations more explicitlyResults are not altered by reordering the variables and by aconsequent selection of a different Cholesky decompositionTim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsIntroduction Methodology Results Robustness ConclusionSign Restrictions Identification SpecificationIdentification 1The VAR model comprises monthly data ofReal industrial production (GDP)Annual change in consumer prices (P)Interest rate (i )Real exchange rates (e)Financial sector real stock prices (f )Market real stock prices (s)ShocksGDPPiefsContractionary MP Shocks--+appDepreciation Shocks+++depBased on properties outlined by Uhlig (2005) and Mountfordand Uhlig (2005), Monte Carlo simulations are performedIf the range of impulse response satisfies the signrestrictions, we keep the draw, otherwise we discard it,until 1,000 draws compatible with the sign restrictions areacquiredTim Leelahaphan The University of Warwick, UKMonetary Policy, Exchange Rate and Asian Stock MarketsDocument Outline
  • Introduction
    • MP/Stock Prices
    • ER/Stock Prices
    • Motivation
    • Objectives
  • Methodology
    • Sign Restrictions
    • Identification
    • Specification
  • Results
    • Impulse Responses
    • Var Decomp
    • Findings
  • Robustness
    • Asian Crisis/Open Economy/Fixed ER
  • Conclusion
    • What We Do
    • What We Find
    • Conclusion 1
    • Conclusion 2