GT20903 Financial Markets and Institutions BNM May 2023 Rate Hike and Stock Returns

Investigating the Impact of Monetary Policy on Stock Prices

The monetary policy decisions of central banks often have significant implications for financial markets, particularly stock markets. In the context of Malaysia, Bank Negara Malaysia (BNM) serves as the key authority responsible for setting monetary policy to manage inflation and foster economic growth. In 2022, BNM raised the Overnight Policy Rate (OPR) 4 times, reflecting a proactive stance to address rising inflation. However, in early 2023, BNM paused rate hikes during its January and March Monetary Policy Committee (MPC) meetings, signaling a possible shift in policy approach.

Unexpectedly, during the May 2023 MPC meeting, BNM raised the OPR by 25 basis points to 3%, surprising most economists, who had anticipated no change. This sudden decision likely introduced uncertainty into the financial markets, potentially influencing stock prices as investors adjusted their portfolios in response. Given this unexpected rate hike, it is crucial to
examine its impact on the stock market using event study analysis.

This project aims to assess the market’s reaction to BNM’s May 2023 interest rate decision by analyzing stock returns of Malaysian publicly listed companies. Through this project, students will develop a deeper understanding of the interaction between monetary policy announcements and stock market behavior, thereby enhancing their analytical skills and bridging the gap between theoretical knowledge and real-world financial events.

In this project, you are required to answer the following questions:

i. Is there an impact of the announcement of the interest rate decision on May 3, 2023, on the stock returns of Malaysian publicly listed companies on the day of the event? If there is an impact or if there is not, please explain why.

ii. Is there an impact of the announcement of the interest rate decision on May 3, 2023, on the stock returns of Malaysian publicly listed companies in the days following the event? If there is an impact or if there is not, please explain why.

iii. Which publicly listed company is most affected by the interest rate decision on the day of the event? Please explain why the publicly listed company is more severely impacted by the event.

iv. Which publicly listed company is most affected by the interest rate decision in the days following the event? Please explain why the public listed company is more severely impacted by the event.

To answer the project’s questions, please follow the instructions to estimate the reaction of the stock returns of publicly listed companies to the interest rate decision on May 3, 2023, using event study methodology:

1. Event Selection: On May 3, 2023, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 3.25 percent and 2.75 percent, respectively.

2. Data Collection: Collect daily closing stock prices for a period of 310 daily observations (excluding non-trading days) before the event’s start date and 30 daily observations 2 after the event’s start date. The daily closing stock prices can be collected from https://finance.yahoo.com. I have assigned 6 publicly listed companies for each group (see the ITEL@UMS).

3. Market Model Estimation: Estimate the parameters of the market model using the data collected in Step 2. The estimation will use OLS regression.

4. Calculation of Abnormal Returns: Calculate abnormal returns using the market model estimated in Step 3.

5. Statistical Analysis: Test for the statistical significance of abnormal returns using tests.

6. Conclusion: Discuss the results (refer to the project’s questions) and conclude the impact of the event on the stock returns.

Answer

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