GT20903 Investigating the Impact of Monetary Policy on Stock Prices Financial Markets and Institutions Assignment Malaysia

The monetary policy decisions made by central banks often have profound implications for financial markets, particularly stock markets. In Malaysia, Bank Negara Malaysia (BNM) is the primary authority responsible for formulating monetary policy aimed at controlling inflation and promoting economic growth. In 2022, BNM increased the Overnight Policy Rate (OPR) four times, demonstrating a proactive response to rising inflationary pressures. However, in early 2023, BNM paused these rate hikes during its January and March Monetary Policy Committee (MPC) meetings, suggesting a potential shift in its policy direction.

Unexpectedly, at the May 2023 MPC meeting, BNM raised the OPR by 25 basis points to 3.00%, catching most economists off guard, as they had anticipated no change. This unexpected move introduced uncertainty into financial markets and likely impacted stock prices as investors adjusted their portfolios in response. Given the significance of this unanticipated rate hike, it is essential to analyze its effects on the stock market using event study analysis.

This project seeks to evaluate the stock market’s reaction to BNM’s May 2023 interest rate decision by analyzing the stock returns of Malaysian public listed companies. Through this analysis, students will gain a deeper understanding of the relationship between monetary policy announcements and stock market dynamics. This will enhance their analytical skills while bridging the gap between theoretical knowledge and practical financial scenarios.

Project Questions

The following questions are to be addressed in this project:
i. Did the interest rate announcement on May 3, 2023, impact the stock returns of Malaysian public listed companies on the event day? If yes or no, provide explanations.
ii. Did the interest rate announcement on May 3, 2023, impact the stock returns of Malaysian public listed companies in the days following the event? If yes or no, provide explanations.
iii. Which public listed company was most affected by the interest rate decision on the event day? Explain why this company experienced a greater impact.
iv. Which public listed company was most affected in the days following the interest rate decision? Explain why this company was more significantly impacted.

Instructions for Event Study Methodology

To answer the project questions, follow these steps to estimate the stock returns’ reaction to the May 3, 2023, interest rate decision using event study methodology:

1. Event Selection: On May 3, 2023, BNM’s MPC raised the Overnight Policy Rate (OPR) by 25 basis points to 3.00%. The ceiling and floor rates of the OPR corridor were adjusted to 3.25% and 2.75%, respectively.
2. Data Collection: Collect daily closing stock prices for 310 trading days before the event start date and 30 trading days after the event start date (excluding non-trading days). Daily stock prices can be retrieved from Yahoo Finance. Six public listed companies are assigned to each group (refer to ITEL@UMS).
3. Market Model Estimation: Estimate the parameters of the market model using the collected data through OLS regression.
4. Calculation of Abnormal Returns: Compute abnormal returns based on the market model estimated in Step 3.
5. Statistical Analysis: Use t-tests to determine the statistical significance of the abnormal returns.
6. Conclusion: Analyze the results to answer the project questions and draw conclusions on the event’s impact on stock returns.

Answer

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