An Empirical Analysis of the U.S Monetary Policy Impact on the Saudi Stock Market

Transcription

1. WP /20/14 SAMA Working Paper: An Empirical Analysis of the U.S Monetary Policy Impact on the Saudi Stock Market September 2020 By Ibrahim Abdullah Almahfouz Monetary Policy and Financial Stability Department Saudi Arabian Monetary Authority The views expressed are those of the author(s) and do not necessarily reflect the position of the Saudi Arabian Monetary Authority (SAMA) and its policies. This Working Paper should not be reported as representing the views of SAMA
2. Abstract There are two intents of this paper ; first, to examine the effect of monetary policy in the United States of America – represented by the change in the Fed’s fund target rate over the period 19982019 on the Saudi stock market. Second, to assess the effect of quantitative easing program on the Saudi stock market, I have realized the program to analyze its effect on selected listed Saudi companies. The empirical analysis shows that the effect of monetary Policy in the United States on the Saudi stock market is statistically significant when it comes to the effect of the unanticipated change in the target interest rate; however, no effect is found for the quantitative easing program on the Saudi Stock market. Keywords: Monetary Policy, Stock Market, Quantitative Easing. JEL: G100, G280, E520 Corresponding with Author: Ibrahim Almahfouz, iaalmahfouz@sama.gov.sa
3. 1 . Introduction The monetary policy objective is to control the foremost economic indicators such as inflation, unemployment rate, and GDP growth. Yet, there is a time lag between the monetary policy adjustments and its effect on such indicators. The previous literature showed that the stock market response to monetary policy changes immediately after the policymakers’ decision i.e. announcement effect. Goodhart and Hofmann (2000) indicate that monetary policy adjustments affect equity prices, which are related to the real economy through their influence on households’ spending (wealth effect channel) and investment spending (balance sheet channel). It is important to assess the magnitude of the interest rate effect on stock markets, since stock prices are highly sensitive to economic conditions and reflect the investors’ risk sentiment. In the United States of America, some published papers have examined the response of the stock markets to the Fed's monetary policy decisions over many years. Bernanke and Kuttner (2005) show that monetary policy is effective as the market showed some responses to the changes in the Fed’s fund target rate, especially the unanticipated change in the Federal Reserve policy rate. Saudi Arabian Monetary Authority remains committed to the fixed exchange rate for Saudi Riyal versus US dollar, at its official rate of 3.75 SAR. SAMA maintains a premium on its interest rate above the Fed’s target rate to keep a reasonable spread over the time. The peg has been serving the Saudi economy well for more than three decades, given that the main driver of the economy is the government expenditure, which is mostly financed by oil revenues. Accordingly, the monetary policy in Saudi Arabia aims to
4. preserve the fixed exchange rate and monetary stability through influencing short-term interest rate, liquidity management, and the use of macro-prudential tools. This paper has two particular objectives. First, it examines the effect of the monetary policy in the United States of America –represented by the change in the Fed's fund target rate- on the Saudi stock market –represented by the main market index (TASI). I used the Fed's fund target rate since in Saudi Arabia; policy rates adjustments are highly influenced by the Fed’s monetary policy decisions given the Saudi riyal peg to the US dollar. Using the Fed's Fund target rate will allow us to distinguish between anticipated and unanticipated changes in the monetary policy as the U.S. has a developed futures market that helps in doing so. Secondly, to assess the effect of the American quantitative easing program on the Saudi stock market over three periods –focusing the analysis on a selected number of publicly listed companies to distinguish the companies, which are more likely affected by the monetary policy. 2. Monetary Policy and the Stock Market: Theoretical Background The Capital Asset Pricing Model (CAPM) expresses the correlation between the stock market and monetary policy measures. Investors normally use Capital Assets Pricing Model formula to find the investment risk and what return they should expect.