Stock Market Reaction to Interest Rate Changes by Chinese Central Bank
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| Title | Stock Market Reaction to Interest Rate Changes by Chinese Central Bank
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| Author | Jiang Jinyong Pan Guanzhong and Long Chao |
| Organization | School of Finance , Yunnan University of Finance and Economics |
| Email | gjiang@email.arizona.edu；panguanzhong@126.com |
| Key Words | Interest Rate Policy; Stock Market Reaction; Investor Sophistication; Bond Market Advancement |
| Abstract | In this paper, we examine stock market reactions to interest rate changes by Chinese central bank. Using data from 1996 and 2008, we find that contrary to rational expectations, stock market positively reacts to interest rate increase but negatively to increase rate cut. Specifically, the Shanghai Composite Index (SCI) has an average of 1.5% abnormal return as the result of interest rate increase and -2.1% abnormal return as the result of interest rate cut. However, our further analysis shows that such market reaction does not have persistent effect. The results suggest that investors in Chinese stock market may not be sophisticated enough to rationally price the information content of interest rate change, resulting in temporary misreaction. In addition, the underdevelopment of bond market and frictions in Chinese financial markets may also contribute to inefficient asset prices. Our study helps to understand what hinders the realization of intended effect of central bank monetary policy. Finally, we make tentative policy recommendations regarding the advancement of Chinese financial markets. |
| Serial Number | WP35 |
| Time | 2011-01-10 |
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