Event Study Analysis

One economic policy was that “the Federal Reserve had raised interest rates in hopes of slowing the rapid rise in stock prices” (Romer, 3). At the time the “stock prices had risen more than fourfold from the low of 1920”

Market return is obtained from Exhibit 4, S&P 500 Composite Stock Index Returns of 1926 – 1987 which was 9.90%. the assumption of selecting the returns covering the period 1926- 1987 as this period is long enough to consider various phases of economic and business life cycle that took place during the period and will match the risk free rate under the period of consideration (1926 – 1987)

Using quantitative easing has helped the recovery of the USA and other developing countries. The Fed’s then limited their ability to pursue more measures, but congress ignored those appeals to help support the economy. The Fed’s decided to use smaller steps to help investor expectations and to prevent a possible financial crisis in Europe. In 2011 it was announced that the FED’s would hold short-term interest rates close to zero percent through 2013; to help support the economy. Soon after it was announced that using the “twist” operation would push long-term interest rates down, by purchasing $400 billion in long-term treasury securities with profits from the sale of the short-term government debt. Inaugurating a policy to help shape market expectations, which will raise interest rates at the end of 2014.

5. Mack inlay, A. Craig. (1997). Titled: Event studies in economics & finance. Journal of Economic Literature. Vol 35, Issue (1). Gs. 13-39.

In order to study how stock prices react to these events, approximate three years of continuous daily stock price are chose, beginning at 17th March 2008 and ending more than three months after the final event at 22nd April 2011. In addition, SHANGHAI Stock Exchange Index (SSE) is adopted as a proxy of the market portfolio.

Although business leaders may not have a crystal ball to help them plan for the future, they do have access to a wide range of Federal Reserve publications that can help identify recent and current trends and what these economists believe will take place in the coming months. Given the lingering effects of the Great Recession of 2008 on the American economy today, identifying the future economic outlook for America using this type of freely available information therefore represents a timely and valuable enterprise. To this end, this paper provides a review of relevant publications to identify the Federal Reserve's current assessment of economic activity and financial markets, its current view about inflation and various monetary tools that have been used to stabilize the economic and prices in recent years. Finally, an analysis of the economic outlook for the next 12- to 18-month period is followed by a summary of the research and important findings in the conclusion.

The events of 9/11 further set back an already fragile economy (Figure 2). It heightened uncertainty, shaken confidence, and caused a widespread pullback from economic activity. Equity prices fell sharply for several weeks and credit risk spreads widened. The main focus of the Federal Reserve in the first few days following the attacks was to reinstate the infrastructure of financial markets and to provide massive quantities of liquidity to the functioning of those markets. The enhanced economic fallout from the events of 9/11 led the Federal Open Market Committee (FOMC) to cut the target federal funds rate through the end of the year. (Federal Reserve Board, 2002)

This paper presents a novel examination of the consequences of the Nixon Shock by focusing on the immediate impact of uncertainty rather than the legacy of Nixon's actions. In addition to bringing new analysis to bear on an important monetary event, our work also has significant implications for current debates surrounding monetary policy. In short, our analysis suggests that uncertainty over the course of monetary policy has a negative impact on the real economy. Thus, the novel and unprecedented approaches to monetary policy that have prevailed in the wake of the 2008 financial crisis may impose real costs by engendering uncertainty among economic agents.

“The Federal Funds rate is one of the most influential interest rates in the U.S. economy, since it affects monetary and financial conditions, which has bearings on key aspects of employment, growth and inflation” (Phoenix). Unfortunately, changes in the federal funds rate produces a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the quantity of money and credit, and, eventually, a range of economic variables, including employment,

Theories about how the economy works and what will happen in the economy where there is monetary policy or fiscal policy intervention are appropriate in assisting policy-makers understand the possible implications of decisions they make or are under consideration. However, they are rarely complete models and often outcomes cannot be predicted. Reintroduction of a theory suggests that new evidence in support of the theory has been reported.

Therefore, the quantitative easing adopted from 2009 was trying to gradually resume sustainable economic growth. Quantitative easing has helped to avert what could have been a second great depression (Wall Street, 2011). The US economy has been clawing its way out of the recession in 2009 and recovery has been slow compared to previous economic cycles. Regular review of the pace of securities purchase by the Federal reserve and the overall size of asset-purchase program in light of incoming information and adjusting the program as need be will help foster maximum employment and price stability.

It has been an inauspicious start to 2016 for risky assets: equities have endured their worst first week of the year since 2000. The main trigger has been renewed weakness in the Chinese currency and equity market. Offshore yuan futures contracts indicate -10% devaluation versus the US dollar this year. Global financial conditions have tightened and there must be concern that this further stokes deflationary psychology and intensifies the growth headwinds already in place. The events in global financial markets will not have gone unnoticed by the Federal Open Market Committee (FOMC). The key issue is whether further declines in risky asset prices threaten to undermine the economic and inflation outlook. The minutes to the 15-16 December policy meeting were released last week and were widely interpreted as being dovish. It was, however, a statement by Fed Vice Chairman Fischer, who sees four increases in the federal funds target in 2016, that also put equity markets on a bearish footing. The gulf in the policy outlook between the FOMC and financial markets remains considerable: federal funds futures contracts expect the target to be 0.75% in December compared to the 1.25% forecast by policy makers. The expectations of financial markets have, however, recently been more accurate about monetary policy conduct than the forecasts of FOMC members themselves. Fed policy is data dependent and the early economic releases in

As known, ensuring price stability was the ultimate aim of the monetary policy by targeting an inflation rate or interest rate. Before the global financial crisis, most central banks took an expansionary approach to asset price and credit booms. As a result, monetary policy was to react to changes in asset prices and credit aggregates only to the extent that they affected inflation (Bernanke and Gertler, 2000). After the crisis, policy makers recognized the dangers associated with financial imbalances so that central banks tending to follow the flexibility. In many financial markets, considering about financial imbalances like foreign-exchange rate, interest rate, unemployment rate and fast credit growth becomes a more significant role on monetary policy. Meanwhile, there is no doubt that monetary policy has a direct effect on financial markets like stock market, bond market, mortgage market and so on. The aim of this article is to focus on the relationship between monetary policy and stock market movements. There is evidence that the stock returns is affected by the money supply rate. The link between the two parts is particular interest and the stock prices are sensitive to economic conditions. Therefore, the stock prices’ trend is able to become a reflect of the monetary policy’s influences on stock market. In total, one of the ways that monetary policy uses to stabilize the financial market is to adjust interest rate, which affects firm’s equity and the stock liquidity.

In the past 20 years, the central banks in most developed countries had successfully managed to control the inflation rate. However, the financial crisis 2008 has highlighted the links between financial market and policy. (Ravn, 2011) The topic I am going to discuss is the relationship between monetary policy and the stock market. What factors have influenced interest rate and how the policymakers should react to the change in stock market have driven the increasing attentions lately. Taylor Rule (2003) will be the core theory used to discuss the model tested. The interpretation of simple Taylor rule is very straightforward. According to the equationi_t=c+β(π_t-π_t^* )+γ(y_t-y_t^* )+ε_t , the policy will be mainly affected by inflation gap and output gap. (Woodford, 2001) The reason why Taylor uses interest rate to represent monetary policy is that the central bank likes to adjust interest rate as a tool to maintain the balance in the market. While, there is a strong debate about the other variables, in particular, stock price volatility. After taking asset price volatility into account, the augmented Taylor rule equation will be reformulated as:i_t=c+β(π_t-π_t^* )+γ(y_t-y_t^* )+∑_(k=1)^n▒〖δ_k s_(t-k)+ε_t 〗. It will influence the monetary policy while the importance of asset price in the market is very controversial. Scholars including Bernanke and Gertler question the importance of asset price in determining the monetary policy and claim that the influence

In the real financial cycle, there is an important relationship between the monetary policy and stock market. In different stock market, the effectiveness of monetary policy is different. In the bear stock market period, the monetary policy is more effective than in bull stock market periods. This article analysis how does the monetary policy effect the stock market in the Association of Southeast Asian Nations “ASEAN-5” economies (Malaysia, Singapore, Indonesia, the Philippines and Thailand). The economists use Markov switching models and the rule-based nonparametric approach with data from Jan 1991 to Dec 2011. As a result in the long-run, the monetary policy has a negative and statistically significant on real output in both market periods (bull and bear). In the short run, there is no statistically significant relationship between monetary policy and real output.