nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒10‒03
two papers chosen by

  1. Confidence Erosion and Herding Behavior in Bond Markets: An Essay on Central Bank Communication Strategy By Koichiro Kamada; Ko Miura
  2. Response of Stock Markets to Monetary Policy: An Asian Stock Market Perspective By Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad; Hassanzadeh, Ali; Prasetyo, Ahmad Danu

  1. By: Koichiro Kamada (Bank of Japan); Ko Miura (Bank of Japan)
    Abstract: This paper examines the distinctive behavior of long-term interest rates observed after the Bank of Japan's introduction of quantitative and qualitative monetary easing, by focusing on changes in traders' confidence and herding behavior. When participants in bond markets lose confidence in their outlook for future interest rates, their investment decision depends heavily on the developments of market prices. This often leads to herding behavior among traders and destabilizes market prices: demand fuels further demand, or supply fuels further supply. This study develops a theoretical model and employs it for stochastic simulations to show that volatility of bond prices and trading volumes is affected by a number of factors, such as investors' confidence in the financial environment, the usefulness or value of information available in the market, and the market liquidity of bonds. In addition, the model is fitted to actual data to specify the driving forces underlying the changes in long-term interest rate volatility observed in 2013. The analysis shows that the key to understanding the developments in long-term interest rates during this period lies in how traders interpreted information flows in the market, especially the announcement by the Bank of Japan regarding its policy change, and in capturing the extent to which their confidence was weakened or strengthened by those information flows. The findings of the analysis highlight the importance of formulating a communication strategy as part of the conduct of monetary policy and the challenges in implementing such a strategy.
    Date: 2014–04–11
  2. By: Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Hassanzadeh, Ali (Asian Development Bank Institute); Prasetyo, Ahmad Danu (Asian Development Bank Institute)
    Abstract: We estimate the response of Asian stock market prices to exogenous monetary policy shocks using a vector error correction model. In our paper, monetary policy transmits to stock market price through three routes: money by itself, exchange rate, and inflation. Our result points to the fact that stock prices increase persistently in response to an exogenous easing monetary policy. Variance deposition results show that, after 10 periods, the forecast error variance of beyond 53% of the Tehran Stock Exchange Price Index (TEPIX) can be explained by exogenous shocks to the US dollar–Iranian rial exchange rate, while this ratio for exogenous shocks to Iranian real gross domestic product was only 17%. We argue that such evidence can be accounted for by an endogenous response of the stock prices to the monetary policy shocks.
    Keywords: asian stock market; monetary policy shocks; vector error correction model
    JEL: E44 G10 G12
    Date: 2014–09–05

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