Monetary policy shocks and stock market volatility in emerging markets

Abstract

This paper examines the effect of monetary policy decisions on stock markets in emerging economies particularly South Africa for the period 2000Q1 to 2016Q4. This is important as the monetary authorities would understand how their decisions may cause reactions to the stock market. Monetary policy directly shocks money supply and repo rate and indirectly GDP and inflation among many macroeconomic variables. A hypothesis that stock markets do not respond to monetary policy determinations is formulated and tested using a two-stage approach by employing first the vector error correction model to determine the long-run relationship of the variables and secondly GARCH (1, 2) model to determine the volatility. And the results suggest that about 5.2% variations in the Johannesburg Stock Exchange (JSE) volatility are due to monetary policy shocks. Overall, there is a negative relationship between M2 and stock market volatility. However, there is a positive link between repo rate and JSE volatility, which is not economically preferable because variations in repo rate influence the aggregate demand of investment on securities. The study recommends that the Monetary Policy Committee an expansionary monetary policy of keeping the repo rate lower must be pursued in order to increase borrowing that makes the public to have money to make transactions in securities on the financial market.

The Effect of Regulations on Stock Market Risk (Volatility) in Nigeria

“…Indeed, regulations constitute frictions that distort buying and selling at the exchange (Olbrys & Majewska, 2014). This finding tends to support Zare et al (2013) that monetary policy (Interest rate in their study) influences stock market volatility; as well as Tchereni and Mpini (2020) who reveal that repo rate (the equivalent of the monetary policy rate in Nigeria) has a positive impact on volatility.…”

“…The result revealed that policy on deposit reserve ratio influences stock market volatility. Tchereni and Mpini (2020) considered the impact of monetary policy on stock market volatility in South Africa for the period spanning the first quarter of 2000 to the fourth quarter of 2016, applying an error correction model. Results revealed that the money supply negatively influences volatility, while the repo rate has a positive effect on volatility.…”

Causality between Green Stock Market with Monetary Policy, Global Uncertainty, and Environmental Damage in Indonesia

“…The final test of the studies (eg. Bissoon et al, 2016;Sahu and Pandey, 2020;Zhang and Zheng, 2020;Tchereni and Mpini, 2020). These results also explain that monetary policy is also effective for emerging market stock markets.…”

Nexus between Monetary Freedom, Political Stability and Exchange Rate with Sustainable Stock Market Development in Pakistan: A Comparative Analysis by ARDL and NARDL

“…A. Khan, Ejaz, and Safdar (2023) Khan and Ejaz (2023) tested and discussed monetary freedom related supportive policies (like financial freedom, investment freedom, and trade freedom, government transparency, judicial effectiveness and rule of law) with stable politics and foreign exchange rate pose a positive and significant correlation with the equity market development (Ali, Javid, Ahmad, Ahmad, & Khan, 2021;Suhaibu, Harvey, & Amidu, 2017;Tchereni & Mpini, 2020).…”