The Short - Term Impact And Cumulative Effect Of China 's Interest Rate Policy On Stock Market

Based on the daily yield data of Shanghai Composite Index from2005to2012, we introduced dummy variable in the ARMA (1,1)-GARCH (1,1) mean equation to represent the interest rate policy, in order to verify the effect of the short-term impact on the stock market. Then, we added policy variables in ARMA (1,1)-EGARCH (1,1) conditional variance equation, to test if the policy would increase the volatility of the stock index yields on announcement day. What’s more, with Bootstrap technology in event study methodology, we quantified the daily excess return and cumulative excess return of stock index10days before and after interest adjustments. We found that regardless of the direction, interest rate policy did not significantly impact stock market in the short-term and during the cumulative period. However, when separated apart both directions of policy, we realized that the interest rate positively correlated with stock index in short term, and that the former one did not enhance the volatility of stock market on announcement day. Both rising and cutting policies can result in positive cumulative excess returns, but those two significantly differed in market behaviors and the cumulative effects. That’s because during stock market cycles and different macroeconomic situations, the level that investor reacted to the reverse signal is varied. Finally, we gave some recommendation to both central bank and the investors according to the empirical results.