Investors react to surprises? Further evidence from interest rate announcements in Poland

Friday, 18 March 2016: 4:50 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
The National Bank of Poland (NBP)  had a transparent communication policy with financial markets and since August 2000, has been regularly publishing a wide range of macroeconomic data regarding its monetary policy variables.     The calendar of these announcements  sometimes was known  so that market participants  could take this into account in their investment decisions, however sometimes the  announcements  did not appear on regular dates.  In this study, we quantify the reaction of financial market in Poland to the announcements of this information .

In  particular we investigate the reaction of the financial markets in Poland (in its three main segments: stock market, foreign exchange market and money market) to the National Bank of Poland (NBP) announcements of interest rate changes. Our sample period spans from August 2000 when the NBP started to make its announcements regarding the monetary policy data on a regular basis.

We extract the surprise component from the NBP announcements by comparing the actual change of the interest rate with market expectations, which we capture through consensus forecasts from Reuters surveys of financial market participants in Poland.

Our findings, relying on GARCH models with dummy variables, suggest that markets respond to interest rate announcements on the same day, with a weaker effect extended to the next day, however the reactions vary across the three investigated market segments.

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Keywords:Interest Rates; Central Bank; Public Announcements; Foreign Exchange Market; Stock Market; Money Market.

JEL classification: E5, F3, G1, O2, P3.


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