Changes in stock price volatility and monetary policy regimes: Evidence from Asian countries

Abstract

This paper investigates the interactions between changes in stock prices and monetary policy regimes in four emerging Asian countries - Korea, Malaysia, Singapore, and Thailand - using a Markov regime-switching autoregressive conditional heteroskedasticity (MS-ARCH) model. To connect the stability of monetary policy to stock market volatility, the authors assume that monetary policy and stock price regimes are governed by the same fundamental: the state of the economy. They find that there exists an asymmetric relationship between the volatility of stock prices and the stability of monetary policy regimes. Most of their findings are consistent with real world observations.