The Impact of Central Bank Public Announcements on Foreign Exchange and Stock Markets

Thursday, March 12, 2015: 5:45 PM
Jerzy Gajdka, Prof. , Department of Industrial Economics and Capital Market, University of Lodz, Faculty of Economics and Sociology, Lodz, Poland
Janusz Brzeszczynski, Prof. , Northumbria University, Newcastle Business School (NBS), Newcastle-upon-Tyne, United Kingdom
Ali M. Kutan, Prof. , Southern Illinois University Edwardsville, Edwardsville, IL, USA, Edwardsville, IL
Central Bank Communication and the Impact of Public Announcements of New Monetary Policy Data on the Reaction of Foreign Exchange and Stock Markets: Evidence from Poland

We analyze the impact of monetary policy communication of the National Bank of Poland (NBP) on financial market. NBP has been conducting transparent communication policy with financial markets and since August 2000 it has been regularly publishing a wide range of macroeconomic data regarding its monetary policy variables. The calendar of these announcements has been known and disseminated a long time in advance, so that market participants have always known it and could take it into account in their investment decisions. In this study, we quantify the reaction of financial markets in Poland to the announcements of this information released by the BP. i.e. announcements of interest rates changes and NBP announcements of new macroeconomic figures, on the financial market in Poland in its two main segments: the foreign exchange market and the stock market. We provide evidence on how markets react to public information released by the NBP. In particular, we are interested in the uncertainty (i.e. risk) effects, volume of trade and the wealth (i.e. return) effects of NBP communication, i.e. whether the NBP announcements had any influence on stock and foreign exchange returns and on the activity of those two markets. Using ARCH methodology, we document negative effects in the conditional variance of ARCH models of WIG index volume of trade and WIG returns and PLN/USD bid-ask spread and PLN/USD returns, suggesting the existence of calming effects of NBP communication with financial markets on the changes of their activity. The evidence presented in our study indicates that the NBP announcements had stabilizing effects on stock and foreign exchange markets in Poland. The results from our study also imply that the National Bank of Poland has consistently influenced the financial markets, not only during the early years of the central bank when it received its independence, but also during the later years. This confirms that the NBP is an important player in affecting domestic financial markets and investors need to pay attention to policy announcements which NBP releases on regular basis.

Keywords: Central Banking, Monetary Policy, Public Information Arrival, Currency Market, Stock Market.

 

 

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