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ESSAYS ON FINANCIAL MARKETS AND MONETARY POLICY

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Title
ESSAYS ON FINANCIAL MARKETS AND MONETARY POLICY
Author
Jang, Hyeonung
Advisor
Seo, Byoung Ki
Issue Date
2021-02
Publisher
Ulsan National Institute of Science and Technology
Abstract
I present three essays on financial markets and monetary policy. The first essay examines the effect of information shocks on immediate stock price responses to monetary policy announcements. Analyzing information shocks, which are defined as stochastic stock price jumps, I find that information shocks mitigate the impact of monetary policy surprises on stock prices. Furthermore, the effect of information shocks appears more pronounced when they failed to attract sufficient investor attention, suggesting that the effect of information shocks is driven by information that is not incorporated into stock prices. I further show that underreactions to earnings announcements also prevent the information in monetary policy announcements from being incorporated into stock prices. The results imply that in the presence of information subject to an underreaction, the information asymmetry between investors who have different information-processing capacities increases. The second essay explores the international impact of the U.S. Federal Reserve (Fed) communication, especially on the Korean stock market. I find that the Korean stock market has been moved along with the US stock market showing high excess return in even weeks after the Federal Open Market Committee (FOMC), and it could be explained by the Fed informal communication. The results show that the biweekly pattern of Korean stock market return is associated with the reduced uncertainty of monetary policy in Korea, and there is no evidence that US stock market returns have a direct impact. Further, I find that, if the economic uncertainty of Korea is high, the Korean stock market has experienced larger excess. However, there is no supporting evidence the Korean stock market is significantly affected by Fed communication after the financial crisis, suggesting that the spillover of short-term interest rate expectation is important to explain this phenomenon. In the third essay, I explore energy prices including crude oil, gasoline, and heating oil around the Federal Open Market Committee (FOMC) announcement periods. This chapter expands on my published work (Jang and Seo, 2020) and contains results that were not available due to length limitations. In this chapter, I find that the energy market has experienced abnormal price movements before the scheduled FOMC announcements, which are proportional to the FOMC’s monetary policy decision on the following day. The energy prices are only affected by the expected portion of monetary policy rate changes but not by the unexpected portion of monetary policy changes. I also provide evidence that the volatility of the energy prices could be increased on the day before FOMC announcement dates when the expected monetary policy rate change is negative, suggesting that it could be explained by the asymmetric volatility effect.
Description
School of Business Administration (Management Engineering)
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