Monetary Policy and Stock Market Returns: Does the ZLB make a difference?

• Thesis title in Czech: Monetary Policy and Stock Market Returns: Does the ZLB make a difference?
• Thesis title in English: Monetary Policy and Stock Market Returns: Does the ZLB make a difference?
• Academic year of topic announcement: 2016/2017
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 16.06.2017
• Date of assignment: 16.06.2017
• Date and time of defence: 20.06.2018 09:00
• Venue of defence: Opletalova - Opletalova 26, O314, Opletalova - místn. č. 314
• Date of electronic submission: 07.05.2018
• Date of proceeded defence: 20.06.2018
• Opponents: PhDr. Jiří Schwarz, Ph.D.

Guidelines

The monetary policy during years was largely conducted by using conventional instruments, which were the main tool of policy makers. However, with the financial crises of 2008 the interest rates were decreased to boost spending and to support the stability of the financial system. At that time the usage of interest rates was the main tool through which the monetary policy was implemented and transmitted, but ever since the interest rates reached the so called zero level bound they never recovered. That situation leaded to a new way of conducting the monetary policy, which was through the usage of unconventional instruments. The set of unconventional instruments includes among others credit easing, quantitative easing, forward guidance and signaling. Considering that many papers in the past have perceived the relation between monetary policy and stock market returns by studying the conduct of the policy based on conventional instruments, it is judged that an assessment of the current situation by considering the implementation of unconventional policies could contribute to the literature. Moreover, the research can be further developed in form of a comparative analysis for the case of US and EU.

References

1. Jordi Galí, L. Gambetti (2013). The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence. 1-36.
2. Aziza, F. O. (2010). The Effects of Monetary Policy on Stock MarketPerformance: A Cross-Country Analysis. ResearchGate, 1-113.
3. David Bowman, J. M. (2015). U.S. unconventional monetary policy and transmission to emerging market economies. Elsevier Ltd., 27-59.
4. Roberto Rigobon, B. S. (2001). Measuring the Reaction of Monetary Policy to Stock Market . 1-32.
5. Sellin, P. (2001). Monetary Policy and the Stock Market: Theory and Empirical Evidence. Journal of Economic Surveys, 343-394.
6. Wright, J. H. (2014). Evaluating asset-market effects of unconventional monetary policy: a multi-country review. Econ Policy, 749-799.

Preliminary scope of work

The study will be structured into six chapters, starting with the introduction which among others includes a presentation of the topic, the main research questions, the limitations of the study, the structure of the paper, etc. It will be followed by literature review chapter which will provide a summary and a detailed analysis regarding the existing research on the topic. The third chapter will provide a detailed assessment of the data, variables and the methodology to be employed. Next chapter will treat the comparative analysis between US and EU in order to reveal two different perspectives of the situation. It will be followed by the empirical findings chapter, which is concerned with the estimation of the model and the interpretation. The final chapter will be about the conclusion on the topic, summarizing the findings and making some suggestions on further research on this topic.

Expected Contribution:

Considering the shift from the traditional conventional tools to unconditional tools of monetary policy, a study of this kind can contribute by revealing the uncertainties of this change. It is important to quantify to what extent the usage of unconventional tools impacts stock returns. In addition, the way of pursuing the policies needs to be identified in order to push the variable of interest to the desired direction and exert the neccessary impact on it. Moreover, the application of this study to US and EU would contribute to a broader understanding of the monetary policy interventions, by revealing the successes and drawbacks of each intervention.

Hypotheses:

1. The impact of monetary policy on stock prices after the financial crisis when interest rate hit the zero level bound became more relevant.
2. Significant movements in asset prices require intervention of monetary policy makers, which pursue different strategies in respect to the movement’s direction.
3. The effectiveness of unconventional instruments in responding to changes in asset prices is reflected in a short-period.
Methodology:

The methodology to be employed in this research is based on vector autoregressive models and is further extended by allowing for time varying parameters. Former studies have found TVP-VAR very useful in modeling the monetary policy impact on stock market returns. In addition, inspired from a study conducted by Galí and Gambetti (2013) on assessing the impact of monetary policy in impacting stock market bubbles, it is intended to further extend their analyses till now days in order to assess the change in policy application due to the ZLB issue. This model further allows for analyses of shocks and assesses the severity of their impacts. It will be used to test the effectiveness of the policy and its speed of adjustment. In addition, further analyses through variance decomposition can determine the pure impact of the stimulated shock on stock returns. The econometric assessment will be conducted for the case of United States and Europe, aiming to reveal two alternatives of monetary policy application by analyzing their differences and similarities.