Abstract
The study aims to analyze stock price movements of the world’s widely used index S&P 500 and the rapid growing economy index of Dubai Financial Market (DFM). While UAE adopts a similar monetary policy to the US due to the pegging of the two countries’ currencies, UAE’s GDP and financial markets have been witnessing more robust performance since the financial crisis, raising the issue as to whether following monetary policy actions set by the Federal Reserve Bank is beneficial to the UAE financial markets. The paper investigates the effect of changes in Federal Funds Rate (FFR) on the domestic U.S. market returns studied through S&P 500 and the international UAE DFM market returns observed through DFM index. The models under analysis not only look at the effect of changes in the FFR on market indices’ returns, but also whether U.S. monetary policy reversals have a stronger effect than other changes, by imposing a dummy variable adjustment to the model. As part of robustness testing, further analysis is carried out by defragmenting the data into the pre and post financial crisis of 2008. Findings suggest that the DFM index is highly sensitive to the change in FFR compared to S&P 500 index. Compared to the pre financial crisis, both the S&P500 Index and DFM Index are significantly affected by positive changes in the FFR. Positive changes in the FFR tend to affect the DFM returns more negatively than S&P500 Returns, suggesting any future positive change in FFR would affect the financial markets negatively, by pulling prices down globally.
Highlights
Stock markets are volatile in nature and there are many factors that affect the stock prices including global events, performance of companies, new acquisitions, change in policies, changes in interest rates, among others
It is noticeable that the relationship between the return of Dubai Financial Market Index (DFM) and changes in the Federal Funds Rate (FFR) is positive after the financial crisis
The R2 value of 24.2% for the DFM index model is supported by the low p-value for the change in FFR and refined FFR which were very low and below 0.05, suggesting changes in FFR, whether positive or negative tends to have a significant impact on changes in the UAE Index returns
Summary
Stock markets are volatile in nature and there are many factors that affect the stock prices including global events, performance of companies, new acquisitions, change in policies, changes in interest rates, among others These events or changes may lead to an increase in some stocks’ market values and decrease in others, where the net effect can be proxied through changes in a stock market index, which is a basket of different securities or stocks. With a limited use of monetary policy options, the UAE policy makers are left mostly with macro- prudential regulation tools to control excess credit growth and lending for instance. To this end, the paper provides some highlights to whether adopting foreign monetary policy led by the US leads bears some significant relationships to the DFM market in terms of capital gains or losses. Will the reduction in the highly accommodative interest policy set in the US have policy implications for the domestic and foreign financial markets, where such markets are usually reflecting the any possible effect, contagion or not, on an economy
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
