Overnight Policy Rate Changes and Stock Market Reactions –The Experience in Malaysia

Abstract

This paper examines stock market reactions to changes in the overnight policy rate (OPR) by the Monetary Policy Committee (MPC) in Malaysia.  The paper examines the effects of 44 Monetary Policy Committee meetings from January 2006 until December 2011. During this period the OPR has been revised upward six times, maintained at the same level for 35 times, and revised downward three times. The study fails to detect any significant market behavior in the days leading to and immediately after the announcement of the OPR is made. This implies that the stock market may have anticipated the information before the MPC meeting. Interestingly, the stock market seems to respond to the cut in the OPR judging by the higher mean daily return as well as lower standard deviation reported in the post-announcement period. In fact, prior to a reduction in the OPR, the stock market registers a negative mean daily return in the pre-announcement period. The mean daily return increases in the days after the OPR cut. The stock market seems to benefit from the downward revision of the OPR. Perhaps, the central bank can use this policy instrument as a means to stimulate the stock market.