Monetary Policy Announcements and Stock Price Behavior: Empirical Evidence from CNX Nifty

Abstract

This paper investigates, whether monetary policy announcements contain any informational value to the stock market and examines the efficiency of the Indian stock market in the semi- strong form. An event study was conducted on fifty companies comprising the CNX Nifty index. The sample was divided into two different groups on the basis of good and bad announcements. The Abnormal Returns (ARs), Average Abnormal Returns (AARs) and Cumulative Average Abnormal Returns (CAARs) were computed based on the single index model using daily closing price data of companies and nifty. The behavior of these variables was examined for 15 days before and 15 days after the event day. The study found that the impact of the announcement on the event day may or may not be significant because sometimes event announcement has already been discounted by the market in advance, however during the event window of 31 days (i.e. -15 to +15) AARs and CAARs were positive for good news and negative for bad news on most of the days that clearly indicated that announcements possess important information which leads changes in the stock prices. The trend of CAARs indicated that it rose (good news) and declined (bad news) continuously even several days after the event day that reflected slow assimilation of information to the stock prices. Therefore the study concluded that monetary policy announcements hold important information to the stock market but the Indian stock market was not efficient in the semi strong form of Efficient Market Hypothesis (EMH) during the study period.