Sensitivity Analysis of Stock Market with Respect to Monetary Policy : Small Economy VS. Large Economy

Monetary policy is that part of the macroeconomics, which attempts to achieve a set of objectives that are expressed in terms of several macroeconomic variables such as inflation, real output, money supply, exchange rate or employment. As a result, any change in the monetary policy will have an effect on these variables. For instance, monetary policy actions such as changes in the central bank discount rate may have an indirect effect on these variables. Therefore, it has been said that as broader financial markets are quick to incorporate new information, a more direct and contiguous effect of changes in the monetary policy instruments may be identified using financial data. Hence, in order to identify the monetary policy mechanism transmission into the stock market, understanding the sensitivity of stock market with respect to monetary policy is very important. This book examines whether current economic activities or more specifically the monetary policy tools of Bangladesh and India can explain stock market returns in short run and long-run horizon by using a number of multivariate tests.