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Frontiers in Finance and Economics is a UGC APPROVED International Journal of Research

Stock Market Reaction to Unexpected Changes in Interest Rates

Gitit G. Gershgoren, Shmuel Hauser
Most studies on monetary policy of central banks in many countries have focused primarily on price stability in the long-run. In this study, we investigate the short-term (within days) effect of that policy on the stock market. We employ the Vector Error Correction Models to estimate the relationship between interest rates, share prices and other macroeconomic variables to estimate the expected and unexpected interest rates announced by the Central Bank, and the GARCH model to characterize stock prices volatility. Based on these estimates, we use an event study methodology to investigate the immediate effects of unexpected announcement of interest rates by the Central Bank on share prices and their volatility. Using a unique data set obtained from the Bank of Israel we find that despite of its success in achieving the goal of price stability in the long-run, the impact on the stock market in the short-run was unwarranted, as it often generated superfluous share prices fluctuations.
Keywords: stock market, interest rates
JEL classification: E44, G14
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Frontiers in Finance and Economics

FRONTIERS IN FINANCE AND ECONOMICS with ISSN no. 1814-2044 Multi-Disciplinary Journal of Economic, Finance and Business and Management Sciences. Frontiers of Finance and Economics, a bi-Annual UGC Approved Journal. Send papers for publication to editor@ffejournal.org

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