Journal of Finance and Economics

Journal of Finance and Economics

ISSN: 2291-4951 (Print)    ISSN: 2291-496X (Online)

Volume 2 (2014), No. 4, Pages 1-16

DOI: 10.12735/jfe.v2i4p01

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The Effect of Policy Rate Changes on Bank Stock Returns in Pakistan

Habib-Ur-Rahman1  Hasan M. Mohsin2  Patrick A. Rivers3 

1Faculty of Business, Bond University, Gold Coast, Australia
2Department of Econometrics and Statistics, Pakistan Institute of Development Economics, Quad-i-Azam University, Islamabad, Pakistan
3HCM, Southern Illinois University, USA

URL: http://dx.doi.org/10.12735/jfe.v2i4p01Citations: 2 (Details)

To Cite this Article     Article Views: 824     Downloads: 531  Since January, 2015

Abstract

Objective of this study is to analyze the impact of policy rate changes on bank stock returns in Pakistan by using daily stock returns from 1998 to 2011. We used event study approach by constructing the estimation window of 250 days and an event window of 31 days (15 pre-event days, event day and 15 post event days. The daily stock returns from 1998 to 2011 have been used to analyze the impact of policy rate changes by State Bank of Pakistan (SBP) on banking stock returns. The study used ARIMA model to estimate the normal returns by using estimation window of 250 days. Since Monetary Policy committee decides changes in policy rate, we have used date of MP Committee meeting as an event. Reportedly, 35 meetings were conducted during study period from Jan 1998 to Dec 2011. Abnormal returns are calculated by taking the difference of actual daily stock returns and estimated daily stock returns. Abnormal daily stock returns are aggregated as cumulative abnormal returns (CAR). The CAR at 0.6340 showed a significant impact of policy rate changes on banks stock returns. The study finds 31 out of all 35 events have significant impact on banks stock returns and returns were normal at 4th day of MP announcement. Further, we analyzed the impact with respect to expansionary and contractionary monetary policy and observed that the highest positive impact on banks stock returns was due to expansionary monetary policy.

JEL Classifications: E44, E52, E58, G21

Keywords: bank stock returns, monetary policy, event window, policy rate changes

To Cite this Article: Habib-Ur-Rahman, Mohsin, H. M., & Rivers, P. A. (2014). The effect of policy rate changes on bank stock returns in Pakistan. Journal of Finance and Economics, 2(4), 1-16. http://dx.doi.org/10.12735/jfe.v2i4p01

Copyright © Habib-Ur-Rahman et al.

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This article is published under license to Science and Education Centre of North America. This is an Open Access article distributed under the terms of the Creative Commons Attribution 4.0 International License.

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The Effect of Policy Rate Changes on Bank Stock Returns in Pakistan
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