The objective of this paper is to analyze the impact of monetary policy announcements on stock returns. An event window of 31 days and an estimation window of 250 days was constructed. The ARIMA model is applied to calculate the estimated returns from the estimation window (t - 250). Abnormal returns were calculated by taking the difference between actual and estimated returns. Then abnormal returns were aggregated as cumulative abnormal returns (CAR). CAR at 30% showed an impact of monetary policy announcements on stock returns. Null hypothesis of zero abnormal returns was rejected since the results were found in critical region under normal distribution. Further, we decomposed the interest rate into expected and un-expected to analyze their impact on stock returns. After checking for stationarity, Engle-Granger co-integration test was applied to check long run relationship between interest rates and stock return. A significant effect of interest rates (expected and un-expected) was observed in the short run. These results are in line with Kuttner's (J Monet Econ 47:523-544, 2001), Bernanke and Kuttner's (J Financ 60:1221-1257, 2005), Bredin et al.'s (US stock returns the impact of domestic monetary policy shocks, http://www.ucd.ie/t4cms/wp0604.pdf , 2007) and Ehrmann and Fratzscher's (Equal size, equal role? Interest rate interdependence between the Euro Area and the United States, European Central Bank Working Paper 342, 2004). The study finds evidence of LR relationship between un-expected interest rates and whereas expected interest rates and stock returns have short term relationship.
Rahman, H. U., & Mohsin, H. M. (2011). Monetary policy announcements and stock returns: Evidence from the Pakistani market. Transition Studies Review, 18(2), 342-360. https://doi.org/10.1007/s11300-011-0208-0