MONETARY POLICY IMPACT ON STOCK RETURNS FOR SELECTED SOUTH ASIAN COUNTRIES

Abstract

In this paper, we examine the monetary policy impact on the stock market returns and volatility for four major South Asian countries (Bangladesh, India, Pakistan, and Sri Lanka). We test our hypothesis that monetary policy influences both the first and second order of stock returns by using monthly data. The short-term interest rate and the Treasury bill rate are employed as proxies for monetary policy. Controlling for industrial production, inflation, exchange rates (vis-à-vis the US dollar), US interest rate, and money supply, our findings indicate that there exists a statistically significant impact of short-term interest rates on stock returns only in the case of Sri Lanka. However, when we consider the Treasury bill rate as a proxy for monetary policy, we find evidence that it has a statistically significant effect on stock returns in all the four countries. There is limited evidence that monetary policy influences volatility.