Monetary Policy and Equity Market Volatility: An In-depth Literature Review

Abstract:

The objective of the paper is to review existing literature published in major journals for the period 2010 to 2017 on the relationship between monetary policy and equity market volatility (reaction). Gaps existing in the literature on the monetary policy or pronouncements on equity markets reaction are identified; giving suggestions on further research areas. Methodology approach adapted is quantitative and structured in nature. The prominence of reviewed literature is premised on publication year, geographical/country location, methodology/data, unit of analysis, and statistical technique used on the relationship between monetary policy and equity market price volatility. The study is based on 67 selected empirical studies published in peer review journals between 2010 and 2017. Findings: surprise or policy uncertainty is the most researched aspect whereas transparency of relevant monetary institutions and emerging economies received the least attention. Equally, political or economic unions had very few or no studies in some regions altogether. Furthermore, most studies focused on single equity market compared to cross-border. The last year of study had the most number of reviewed articles. Research limitation:  the study narrows on how equity markets react to monetary pronouncements or policies. The paper analyzes the influence if any of monetary policies as a macroeconomic tool on equity markets from both a single and cross-border angle. Future studies can expand the sample size and incorporate the qualitative perspective. Originality: the paper captures the most recent studies by covering the period between 2010 and 2017. To the best of author’s knowledge, this is the only article that reviews recent empirical studies on monetary policy and equity market volatility. This could add value to researchers or those working in monetary regulatory institutions and equity markets; by providing a structured and quantitative overview of existing literature.