Monetary Policy and Asymmetric Volatility in Stock Returns: Evidence from Taiwan

Abstract

The issue of monetary neutrality has long been debated by monetary economists and financial economists. However, most studies address this question by examining the equity return with symmetric volatility respond to monetary shock in developed economies, such as in the United States stock markets. This paper employs empirical models to examine the asymmetric conditional volatilities of equity returns to monetary policy rules in the 21 industries indices of Taiwanese stock exchange market. The regular meetings of the Board of Directors (hence forth, BOD) at the Central Bank of China (Taiwan) are used for monetary policy announcements. Not only the regular BOD meetings but the BOD meetings with surprise shocks (unanticipated announcements) are considered for testing the announcement effects (see, Balduzzi, Elton and Green [1]; de Goeij and Marquering [10]). The generalized autoregressive conditional heteroskedasticity extended by Glosten, Jagannathan and Runkle [14] (hereafter, GJR-GARCH) is used to measure our asymmetric conditional volatilities. Finally, the out-of-sample forecasting performance and likelihood ration test are also adopted in the study. We conclude that the asymmetric volatilities of equity prices can be identified based on the changes of monetary policy announcements that occurs around the dates of BOD meetings. More interestingly, the asymmetric effects of conditional volatilities in unanticipated shocks dates are lightly lower than that in regular meetings. The results present that monetary policy has real and quantitatively essential effect on the asymmetric conditional variance in equity returns in Taiwan.