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Impact of FOMC announcement on stock price index in Southeast Asian countries

Impact of FOMC announcement on stock price index in Southeast Asian countries PurposeThe purpose of this paper is to examine the impact of Federal Open Market Committee (FOMC) announcements, which includes information about the targeted Federal fund rate and revision to the future path of monetary policy on Southeast Asian stock market performance.Design/methodology/approachThis paper has used a sample of five national equity market indexes over the period 1997-2013 that covers 132 scheduled FOMC meetings. The authors have developed the model of Wongswan (2009) and Kontonikas et al. (2013) to quantify target surprise and path surprise.FindingsThe results first show that all the stock markets examined do respond to information in FOMC announcements. Second, the target Federal fund rate has more impact on Southeast Asian stocks performance than information about the future path of monetary policy does. Third, different Southeast Asian equity markets respond similarly to targeting the Federal fund rate, while the responses to monetary policy differ from each other. Fourth, the response of each country to the FOMC announcement is not statistically different in the two periods of financial crisis.Research limitations/implicationsSoutheast Asian financial markets are increasingly highly correlated to the US market. The main channel in which FOMC announcement has impact on Southeast Asian stock markets is through US price transmission. This is the case of foreign firms borrowing from the US market. Then, an increase in interest rate, which means that the cost of financing increases, will lower firm equity value.Originality/valueThe understanding of the response of the Southeast Asian stock markets to target surprise and path surprise, and the impact of each surprise in different time periods, would be important to investors and encourage further discussion amongst academics in Southeast Asia, where stock markets have been emerging in recent years. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Impact of FOMC announcement on stock price index in Southeast Asian countries

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
2044-1398
DOI
10.1108/CFRI-06-2016-0051
Publisher site
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Abstract

PurposeThe purpose of this paper is to examine the impact of Federal Open Market Committee (FOMC) announcements, which includes information about the targeted Federal fund rate and revision to the future path of monetary policy on Southeast Asian stock market performance.Design/methodology/approachThis paper has used a sample of five national equity market indexes over the period 1997-2013 that covers 132 scheduled FOMC meetings. The authors have developed the model of Wongswan (2009) and Kontonikas et al. (2013) to quantify target surprise and path surprise.FindingsThe results first show that all the stock markets examined do respond to information in FOMC announcements. Second, the target Federal fund rate has more impact on Southeast Asian stocks performance than information about the future path of monetary policy does. Third, different Southeast Asian equity markets respond similarly to targeting the Federal fund rate, while the responses to monetary policy differ from each other. Fourth, the response of each country to the FOMC announcement is not statistically different in the two periods of financial crisis.Research limitations/implicationsSoutheast Asian financial markets are increasingly highly correlated to the US market. The main channel in which FOMC announcement has impact on Southeast Asian stock markets is through US price transmission. This is the case of foreign firms borrowing from the US market. Then, an increase in interest rate, which means that the cost of financing increases, will lower firm equity value.Originality/valueThe understanding of the response of the Southeast Asian stock markets to target surprise and path surprise, and the impact of each surprise in different time periods, would be important to investors and encourage further discussion amongst academics in Southeast Asia, where stock markets have been emerging in recent years.

Journal

China Finance Review International – Emerald Publishing

Published: Aug 21, 2017

References

  • What explains the stock market’s reaction to Federal Reserve Policy?
  • East Asia and Europe during the 1997 Asian collapse: a clinical study of a financial crisis
  • Does monetary policy have asymmetric effect on stock returns?