Monetary Policy and the Price Behavior in Emerging Stock Markets

IMF Working Papers, March 1, 1991

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Monetary Policy and the Price Behavior in Emerging Stock Markets

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Bibliographic details

• Authors: Peter Cornelius
• Published: March 1, 1991
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451844429.001

Objective

• Examine whether the six largest and most active emerging stock markets are informationally efficient with respect to changes in the money supply.
• Investigate whether stock prices fully reflect the information contained in money supply changes.

Methodology

• Two econometric techniques employed:
  • Direct Granger-causality tests to focus on the short-run relationship between stock prices and money.
  • Co-integration tests to study the long-run behavior of stock prices and money supply.

Main findings

• The results suggest that at least for two markets profitable trading rules can be developed to earn consistently higher-than-normal rates of return.
• Implied conclusion: informational inefficiencies with respect to money supply changes exist in some of the six largest and most active emerging stock markets.

Analytical implications

• Short-run dynamics between money supply changes and stock prices assessed via Granger-causality tests provide evidence on the timing and direction of information flow.
• Long-run co-integration analysis assesses whether stock prices and money supply share a stable equilibrium relationship over time, bearing on persistent predictability.