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Monetary Policy Announcements, Communication, and Stock Market Liquidity
Author(s) -
Lee Jieun,
Ryu Doojin,
Kutan Ali M.
Publication year - 2016
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.12069
Subject(s) - market liquidity , monetary economics , monetary policy , predictability , stock market , business , open market operation , liquidity crisis , volatility (finance) , market maker , liquidity risk , financial system , economics , finance , paleontology , physics , horse , quantum mechanics , biology
Using the high‐quality intraday transaction data from 2001–2012, we investigate changes in stock market liquidity in response to the monetary policy announcements of the Bank of Korea (BOK). We find that liquidity impairment associated with informed trading occurs prior to the announcements but it disappears subsequent to the global financial crisis. In addition, liquidity impairment appears to become more severe with insufficient experts' predictability and accuracy rather than with policy rate change itself and unscheduled announcements. Finally, the Federal Open Market Committee (FOMC) announcements, changes in the Volatility Index (VIX), and trading by foreign investors play a limited role in explaining stock market liquidity changes. Overall, results indicate that central bank communication plays a significant role in reducing liquidity impairment by enhancing the predictability of policy actions, and therefore, mitigating information asymmetry.