THE IMPACT OF MONETARY POLICY DECISIONS ON STOCK PRICES: AN EVENT STUDY

Abstract

Purpose- Stock market is one of the markets where the effects of monetary policy decisions, which is determined by central banks, are felt quickly. Changes in interest rates enable monetary policy decisions to be transferred to the economy by affecting the stock prices. The purpose of this study is to examine the effect of policy interest rate announcements of Central Bank of Republic of Turkey (CBRT) on stock prices of specific sectors in Istanbul Stock Exchange (ISE) Market. Methodology- Brown and Warner (1985) event study methodology is used to examine the stock price response of banking and insurance firms traded in ISE. Sample consist of 18 firms which 12 are banks and 6 are insurance firms between January 1, 2015 and December 31, 2020. Monetary policy meeting announcements are taken as the event which are only related to the up movements of policy interest rate. Abnormal returns (AR) and cumulative average abnormal returns (CAAR) are calculated and t-test is applied within the scope of the study. Findings- Through the sample period there are only three announcements including increase in policy interest rates. Findings show that there is negative price response in banking and insurance firms when the monetary policy interest rates go up. Conclusion- In this study, the effect of the monetary policy interest rate announcements made by the Central Bank of Republic of Turkey (CBRT) between the years 2015-2020 on the returns of banks and insurance companies was examined by using the event study methodology. According to results of the analysis, it has been determined that the CBRT's decision to raise interest rates has a significant negative effect on banks and insurance firms which are traded in Istanbul Stock Exchange (ISE) market. These findings show that monetary policy announcements in Turkey affects financial markets through the policy rate channel and there is a strong transmission mechanism between them.

Keywords

• Monetary policy decisions
• stock prices
• event study
• Brown and Warner
• ISE

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