Stock Market Response to Policy Announcement: Evidence from Banking Sector of Pakistan

Abstract

Monetary policy announcement is important decision which affects the economy. The aim of this study is to identify the impact of monetary policy announcement on stock market in Pakistan for financial year 2014-2015. This is the unique year for studying the impact of announcement on bank’s stock prices, as interest rate has been changed in 4 monetary policies while it remained stable in other announcements. This specific feature can help to uncover the phenomenon. Event study approach has been used to analyze the impact of policy announcement on stock returns. The event window of 15 days is constructed with -7 (pre announcement days) and +7(post announcement days) while 0 is the event day. All commercial banks is the population of study and sample size of 14 commercial banks listed in KSE 100 index. Around the event window, abnormal returns calculated by taking difference of actual return and expected return. Market model is used to calculate the expected returns. Aggregated abnormal return AAR and cumulative abnormal returns CAAR are calculated to find the impact with in event window and across the events window. The results show significant impact of all monetary policy announcements on banks stock returns.

Keywords: Monetary Policy Announcement, Stock Return, Event Study, Banking Sector, KSE 100 Index