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The response of global equity indexes to U.S. monetary policy announcements

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Author Info
Jon Wongswan
Abstract

This paper documents the impact of U.S. monetary policy announcement surprises on equity indexes in sixteen countries, covering both developed and emerging economies. Using high-frequency intraday data, I find a large and significant response of Asian, European, and Latin American equity indexes to U.S. monetary policy announcement surprises at short time horizons. In this paper, I use two proxies for monetary policy surprises: a surprise change to the current target federal funds rate, and a revision to the path of future monetary policy (Gürkaynak, Sack, and Swanson (2004)). Consistent with results for the U.S. equity market, this paper finds that in most cases foreign equity indexes react only to a surprise change in the current target rate. On average, a hypothetical unanticipated 25-basis-point cut in the federal funds target rate is associated with a 1/2 to 21/2 percent increase in foreign equity indexes. The variation of the response across countries appears to be more related to the degree of financial integration with the United States than it is to trade linkages with the United States or the degree of exchange rate flexibility.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 844.

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Date of creation: 2005
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Handle: RePEc:fip:fedgif:844

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Keywords: Monetary policy - United States ; Stock market - Asia ; Stock market - Europe ; Stock market - Latin America;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  8. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany. [Downloadable!]
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  9. Michael Ehrmann & Marcel Fratzscher, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 354, European Central Bank. [Downloadable!]
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  15. repec:rus:hseeco:181565 is not listed on IDEAS
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  19. Gregory H. Bauer & Clara Vega, 2004. "The Monetary Origins of Asymmetric Information in International Equity Markets," Working Papers 04-47, Bank of Canada. [Downloadable!]
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  20. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets," PIER Working Paper Archive 04-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Jun 2004. [Downloadable!]
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  21. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08. [Downloadable!] (restricted)
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  1. Chulia-Soler, H. & Martens, M.P.E. & Dijk, D.J.C. van, 2007. "The Effects of Federal Funds Target Rate Changes on S&P100 Stock Returns, Volatilities, and Correlations," Research Paper ERS-2007-066-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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