Abstract
Interest rates shock which is a measurement of monetary policy changes has significant effect on stock return. Most of the evidences are from the U.S., U.K, Japan and other developed countries. However, there is rare empirical analysis considering China’s case. As an important emerging stock market, China’s stock market shows many specific characters comparing with developed and strong efficient stock market. On the other hand, China’s base interest rates are only controlled by the central bank but not the monetary market which also differ from developed countries. So China’s specificities from both stock markets and interest rates determination mechanism motivate us to analyze the relationship between China’s stock return and interest rates shock. We
first adopts Markov Regime Switching model to divide China’s market into Bull Market (highest mean, media variance), Volatility Market (media mean, lowest variance) and Bear Market (lowest mean, highest variance). And then we find monetary policy shocks do not have significantly negative impacts on the stock return either in the Bull Market regime or No-Market-Regime-Division data as a whole However, a significant negative relation between monetary policy shocks and stock return does exist in both the Bear and Volatility Market regimes.
