The Effects of Monetary Policy Announcements on Stock Market Liquidity (in Korean)

This paper investigates the impacts of monetary policy announcements on stock market liquidity using the real-time transaction data in Korea. The results provide evidence that the liquidity impairment associated with the informed trades occurs around the time of announcements. Moreover, it becomes less pronounced in the post-crisis than the pre-crisis, which may have resulted from the increased transparency of policy actions with credible central bank communication. This finding further suggests how such announcements affect liquidity depending on policy environments: first, the liquidity impairment gets more severe with the low level of experts’ predictability and accuracy, rather than the actual policy change itself. Second, liquidity declines rapidly with unscheduled announcements. Lastly, global factors such as the FOMC announcements or foreign ownership have not contributed substantially to improving liquidity at the time of announcements. Overall, the central bank communication plays a significant role in reducing liquidity impairment by improving the predictability of the policy actions and thus mitigating the information asymmetries between market participants.