Can ignorance about the interest rate and macroeconomic surprises affect the stock market return? Evidence from a large emerging economy

Abstract

This paper analyzes whether the “ignorance” of private agents regarding the monetary policy interest rate and macroeconomic surprises affects the return in the stock exchange in a large emerging economy. Based on the Brazilian economy from January 2005 to September 2021, we build a measure of “ignorance” from the signal-to-noise ratio of the monetary policy interest rate and evaluate its effect on the stock market return. Furthermore, we analyze whether the “surprises” from macroeconomic variables can affect the stock market return. The findings indicate that increases in the “ignorance” of private agents regarding the monetary policy interest rate have a negative and statistically significant effect on the stock exchange return. Moreover, macroeconomic “surprises” have effects on stock market return.