- Email: [email protected]
The channels of monetary policy triggered by central bank actions and statements in the Australian equity market
The channels of monetary policy triggered by central bank actions and statements in the Australian equity market Bronwyn McCredie, Paul Docherty, Steve Easton, Katherine Uylangco PII: DOI: Reference:
S1057-5219(16)30059-X doi: 10.1016/j.irfa.2016.04.008 FINANA 982
To appear in:
International Review of Financial Analysis
Received date: Revised date: Accepted date:
23 March 2015 24 March 2016 10 April 2016
Please cite this article as: McCredie, B., Docherty, P., Easton, S. & Uylangco, K., The channels of monetary policy triggered by central bank actions and statements in the Australian equity market, International Review of Financial Analysis (2016), doi: 10.1016/j.irfa.2016.04.008
This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
ACCEPTED MANUSCRIPT The Channels of Monetary Policy Triggered by Central Bank
Bronwyn McCrediea*
SC
Paul Dochertyb
RI P
T
Actions and Statements in the Australian Equity Market
MA NU
Steve Eastonb
ED
Katherine Uylangcoa
PT
a
QUT Business School, Queensland University of Technology, QLD 4000, Australia b
AC
CE
Newcastle Business School, University of Newcastle, NSW 2308, Australia
*Corresponding Author Bronwyn McCredie, QUT Business School, Queensland University of Technology, QLD 4000, Australia Tel +61 7 3138 5029 Email [email protected] [email protected] [email protected] [email protected] 1
AC
CE
PT
ED
MA NU
SC
RI P
T
ACCEPTED MANUSCRIPT
2
ACCEPTED MANUSCRIPT The Channels of Monetary Policy Triggered by Central Bank
AC
CE
PT
ED
MA NU
SC
RI P
T
Actions and Statements in the Australian Equity Market
3
ACCEPTED MANUSCRIPT The Channels of Monetary Policy Triggered by Central Bank Actions
T
and Statements in the Australian Equity Market
RI P
Abstract
Owing to the discrete disclosure practices of the Reserve Bank of Australia, this paper provides new evidence on the channels of monetary policy triggered by central bank actions
SC
(monetary policy announcements) and statements (explanatory minutes releases), in the Australian equity market. Both monetary policy announcements and explanatory minutes releases are shown
MA NU
to have a significant and comparable impact on the returns and volatility of the Australian equity market. Further, distinct from US and European studies that find strong evidence of the interest rate, bank loan and balance sheet channels and no evidence of the exchange rate channel following central bank actions, this paper finds that monetary policy impacts the Australian equity market via the exchange rate, interest rate and bank loan channels of monetary policy, with only weak evidence
ED
of the balance sheet channel of monetary policy. These channels are found to be operating irrespective of the trigger (monetary policy announcements or explanatory minutes releases), though results are somewhat weaker when examining the explanatory minutes releases. These
PT
results have important implications for central bank officials and financial market participants alike: by confirming a comparable avenue to affect monetary policy; and providing an explication of its
Channels of monetary policy; central bank intervention; monetary policy
AC
Keywords:
CE
impact on the Australian equity market.
announcement; explanatory minutes release; equity market
JEL codes:
E52, E58, E32, G14
4
ACCEPTED MANUSCRIPT 1
Introduction Distinct from US and European jurisdictions, Australian monetary policy is communicated by
T
two separate events: the announcement of the monthly target interbank cash rate for overnight
RI P
loans and two weeks later the release of the explanatory minutes of the central bank board meeting that explicate the rate outcome. This paper uses methodology adopted by McCredie et al. (2014) in
SC
the interest rate futures market, to exploit the segregation of these two events1, providing a unique examination of the channels of monetary policy, triggered by central bank actions (monetary policy
MA NU
announcements) and statements (explanatory minutes releases), in the Australian equity market. Namely, this study provides an examination of all three channels of monetary policy in the Australian equity market: the exchange rate channel, the interest rate channel and credit channels (bank loan and balance sheet) 2.
ED
Extant studies have examined the channels of monetary policy transmission following
PT
monetary policy announcements; with several studies reporting evidence of the interest rate channel based on a heterogeneous response across industries, including Dedola and Lippi (2000) and
CE
Bernanke and Kuttner (2003). Further, Peersman and Smets (2005) report no evidence of the exchange rate channel in the Euro area, as measured by the industry’s degree of openness.3
AC
Ehrmann and Fratzscher (2004), Bernanke and Kuttner (2005) and Maio (2014) report evidence of the balance sheet channel in the US. Similarly, Bernanke and Blinder (1992) provide evidence of the bank loan channel as demonstrated by the impact that monetary policy announcements have on the availability of loans. Finally, Basistha and Kurov (2008) provide evidence in the US market of the 1
The distinction between these practices allows this paper to treat each of these events separately, thereby allowing the calculation of the information content of each event to be measured independently so that the impact of the two events can be statistically compared. 2
Monetary policy is asserted to operate through the exchange rate, interest rate and credit channels of monetary policy when changes to or revised expectations of the target interbank cash rate influence the relative price of domestic and foreign currencies, market interest rates and a firm’s external finance premium, respectively (RBA, 2014).
3
Peersman and Smets (2005) measure an industries degree of openness as the ratio of exports and imports over value added. This proposition, however, was not tested at the firm level.
5
ACCEPTED MANUSCRIPT interest rate channel and both credit channels of monetary policy: the balance sheet and bank loan channels.
T
However to date, no study has examined the channels of monetary policy triggered by
RI P
central bank statements. Intuitively, these channels of monetary policy should be consistent with those triggered by central bank actions. However, some studies claim that monetary policy
SC
actions and statements have a differential effect on asset prices (Guraynak et al., 2005; Rosa, 2011), especially during crisis periods when actions appear to speak louder than words
MA NU
(European Central Bank, 2014)4. The analysis provided in this paper is unique, in that it provides a statistical examination of the differential impact of central bank actions and statements in the Australian equity market.
Additionally, although it could be assumed that the effect of monetary policy in Australia
ED
would be consistent with other jurisdictions, Australia’s equity market composition, financial structure5 and openness are substantially different from its US and European counterparts. For
PT
example the market composition of the Australian equity market is more cyclical with 27.4% of GDP
CE
produced by industry (mining, manufacturing, energy production, and construction) as opposed to 19.5% in the US6 and its financial system is less fragmented7; therefore the impact of monetary
AC
policy via the interest rate channel is expected to be more pervasive. In addition, the openness of the Australian economy8 may elicit a response to monetary policy via the exchange rate channel in
4
According to ECB Board member Mr Peter Praet in his speech to the ECB and its Watchers XV (2014) “Communication is always key for effective monetary policy-making. This is true in normal times, but the benefits of good communication are greatly increased in difficult times. And yet, we should also be aware of the limits of communication. It is no substitute for action.” (pg. 2)
5
According to Georgiadis (2014) the impact of unexpected monetary policy differs across jurisdictions due to a country’s financial structure and market composition. 6
These statistics have been provided by the CIA (2015)
7
Australia has 169 financial institutions (APRA, 2015) compared to the US with 6,463 (FDIC, 2015).
8
According to the OECD ‘Trade Openness’ measure (OECD, 2015), the average of total exports and imports as a percentage of GDP, Australia (20.1%) is a far more open economy than the US (12.6%).
6
ACCEPTED MANUSCRIPT the Australian equity market. Such a response has not been identified in the US or European equity markets.
T
Using a ten year sample from October 2003 to October 2013, this study finds that both
RI P
monetary policy announcements and explanatory minutes releases have a significant and comparable impact on the returns and volatility of the Australian equity market. Further, distinct
SC
from US and European studies that find strong evidence of the interest rate, bank loan and balance sheet channel (Bernanke and Blinder, 1992; Dedola and Lippi, 2000; Bernanke and Kuttner, 2003;
MA NU
Ehrmann and Fratzscher, 2004; Bernanke and Kuttner, 2005; Basistha and Kurov, 2008; Maio, 2014) and no evidence of the exchange rate channel (Peersman and Smets, 2005), this paper finds that monetary policy impacts the Australian equity market via the exchange rate, interest rate and bank loan channels of monetary policy with only weak evidence of the balance sheet channel of monetary
ED
policy. These channels are found to be operating irrespective of the trigger (monetary policy announcement or explanatory minutes’ release), though results are somewhat weaker when
PT
examining the explanatory minutes’ release.
CE
The paper proceeds as follows. Section 2 presents the data and research design. Section 3
AC
presents the results. Section 4 summarises the paper.
7
ACCEPTED MANUSCRIPT 2
Data and Research Design
2.1
Data
T
Monetary policy announcement release dates were obtained from the Reserve Bank of
RI P
Australia (RBA) for the period from October 2003 to October 2013.9 These announcements are currently released at 2:30 pm on the first Tuesday of the month (excluding January when the
SC
board does not meet), following the RBA’s monthly board meeting, regardless of whether the
MA NU
cash rate changes.10 Information pertaining to the release of the explanatory minutes of the monthly RBA board meeting was also obtained from the RBA for the period commencing in December 2007 and ending in October 2013. Since December 2007 these minutes have been released two weeks after the RBA board meeting (that is, the third Tuesday of the month except
ED
January) and are held under embargo until 11:30 am. Consequently, the sample comprises: 111 monetary policy announcements, 31 occasions when the target interbank cash rate was changed (17
PT
rate increases and 14 rate decreases) and 80 occasions where no change was recorded; and 65
CE
explanatory minutes’ releases.
To capture the speed, persistence and variation of the impact of monetary policy on
AC
the Australian equity market, intraday data for the 30-day interbank cash rate, the ASX SPI200 futures contract and the S&P/ASX 200 Index were obtained from SIRCA’s Thomson Reuters Tick History database. This data is reported at ten minute intervals, with the contract/index price being the last traded price each time interval.
9
We begin the analysis in October 2003 to coincide with the commencement of the 30-day interbank cash rate futures contract on the Sydney Futures Exchange which was introduced in September 2003.
10
This practice however has not always been the case. From August 1990 (when rate targeting began) to November 1998, monetary policy announcements occurred at 9:30 am on the day of the cash rate change. This day was not necessarily the day after the RBA board meeting. Further, if there was no change in the cash rate, no statement was released. From December 1998, statements indicating a change were always released the day after the board meeting, but it was not until September 2002 that the RBA began releasing a statement after a no-change announcement.
8
ACCEPTED MANUSCRIPT Business cycle proxies, used to examine the interest rate and bank loan channels of monetary policy, were obtained from the Australian Bureau of Statistics (ABS) and the
T
Organisation for Economic Co-operation and Development (OECD), respectively. Australia’s
RI P
gross national income (GNI) was obtained from the ABS for the period October 2003 to October 2013. This data is reported quarterly in March, June, September and December
SC
with a one period lag. A leading indicator of Australian economic activity was also obtained
MA NU
from the OECD. This data is reported monthly with a three month lag. Balance sheet data, used to examine the balance sheet channel of monetary policy, was obtained from the S&P Capital IQ database for the constituents of the S&P/ASX 200 Index. This database comprises financial statement data and corporate announcements that
AC
CE
PT
ED
have been released publically via the Australian Securities Exchange.
2.2 Modelling the Australian equity market response to unexpected monetary policy announcements and explanatory minutes’ releases
9
ACCEPTED MANUSCRIPT 2.2.1 Impact on return We begin our analysis by employing an event study methodology to examine the response
T
of the Australian equity market to monetary policy announcements and explanatory minutes’
(1)
SC
RI P
releases, using the following equation11:
where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures
MA NU
contract) using ten minute intervals from t-10 to t and it represents the unexpected component of a monetary policy announcement and separately the explanatory minutes’ release. This regression is conducted using the ASX SPI200 futures contract for the full sample period (October 2003 to October 2013) and two sub-sample periods. These sub-sample periods are partitioned at December
ED
2007 due to the change in the RBA’s disclosure practices at this time. 12 In contrast, due to the operating hours of the Australian Securities Exchange (ASX) the analysis involving the S&P/ASX 200
PT
Index only covers February 2008 (December 2007) to October 2013 for monetary policy
CE
announcements (explanatory minutes’ releases). 13 The return on the ASX SPI200 futures contract and the implied return of the S&P/ASX 200
AC
Index are calculated as the percentage change of the last traded prices in each ten-minute interval. Further, to ensure the timeliness and accuracy of the sample, stale prices are screened
11
This methodology is consistent with Bernanke and Kuttner (2005), Kim and Nguyen (2008) and Basistha and Kurov (2008).
12
In December 2007 the RBA: changed the timing of the monetary policy announcement from 9.30am the day after the RBA board meeting to 2.30pm the day of the RBA board meeting; and began to release the minutes of the RBA board meeting two weeks after the monetary policy announcement. 13
As the S&P/ASX 200 Index is only traded during the day between the hours of 10am and 4pm, announcements prior to February 2008, which occurred at 9.30am, cannot be examined.
10
ACCEPTED MANUSCRIPT by excluding any observation where a trade is not reported at each ten-minute interval during the event window (-10,+60). The remaining observations constitute the screened sample. 14
T
Consistent with extant literature (Kuttner, 2001; Bernanke and Kuttner, 2005) the
RI P
unexpected component of the monetary policy announcement is calculated using the near-term 30-day interbank cash rate futures contract, a priori the superior proxy for the interbank cash
SC
rate. 15 This calculation is the difference between the ‘last traded’ price of the near-by 30-day interbank cash rate futures contract in the first minute of trade following the announcement
MA NU
and the ‘last traded’ price in the last minute of trade prior to the announcement. The calculation of the unexpected component of the explanatory minutes’ release differs from the monetary policy announcement, as the second contract in the 30-day interbank cash rate futures is used instead of the near-term contract. The second contract is used due to
ED
liquidity issues caused by the absence of profitable trading opportunities in the near-term
PT
contract once the RBA releases the monthly target interbank cash rate (on the first Tuesday of
CE
the month) and the market has adjusted to the new theoretical price (Smales 2012b). Endogeneity and simultaneity are controlled for by performing this analysis in a narrow
AC
event window.16 This window, which covers ten minutes before and sixty minutes after the event (t-10 to t+60, where t0,9 is the interval in which the event occurs), is designed to capture the speed of the transmission and any variation in the response. Finally, heteroskedasticity in all OLS regressions is controlled for by applying a Huber-White adjustment and trimming outliers from
14
The screened sample consists of 73 (65) monetary policy announcements and 40 (65) explanatory minutes’ releases using the ASX SPI200 futures contract (S&P/ASX 200 Index). 15
Kuttner (2001) and Bernanke and Kuttner (2005) advocate the use of intra-day Fed funds futures contract data to calculate the surprise component due to the accuracy and timeliness of the data and the parsimony of the model produced. 16
By limiting the size of the event window we can limit the possibility of other information impacting our analysis.
11
ACCEPTED MANUSCRIPT the data by excluding any change in the implied yield of the 30-day interbank cash rate futures
T
contract greater than three standard deviations from the mean.17
RI P
2.2.2 Differential impact of unexpected monetary policy announcements and explanatory minutes’ releases
SC
As separate events, the differential impact of monetary policy announcements and explanatory minutes’ releases can be statistically determined. This is done by combining all
MA NU
monetary policy announcements and explanatory minutes’ releases from December 2007 to October 201318 into a single sample, then adding a dummy variable to identify the event type as
(2)
ED
specified in the following equation:
PT
where dEMR is set to one for an explanatory minutes’ release and zero for a monetary policy
CE
announcement. The implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract), Rt, is calculated using ten minute intervals (t0,9 - t-10,-1) to allow the detection of any variation in the
AC
coefficients of β2 and β3.
2.2.3 Impact on volatility To study the volatility response of the Australian equity market to unexpected monetary policy announcements and explanatory minutes’ releases, an exponential general autoregressive
17
The impact of trimming data is minimal with 2 observations removed from the monetary policy announcement sample when using the ASX SPI200 futures contract and 2 observations removed from the monetary policy announcement and explanatory minutes’ release sample when using the S&P/ASX 200 Index. This analysis is also performed using the entire sample. Results obtained are not substantially different. 18
As the release of the explanatory minutes only began in December 2007, the sample period is limited to December 2007 to October 2013 so the comparison of the two events (monetary policy announcements and explanatory minutes’ releases) is valid.
12
ACCEPTED MANUSCRIPT conditional heteroskedastic (EGARCH) model using a student t distribution is employed. 19 This model is advocated by Nelson (1991) and frequently employed in studies of monetary policy (Kim
T
and Nguyen, 2008; Smales, 2012a). This is due to its ability to not only report on the magnitude and
extant asymmetry between positive and negative news. 20
RI P
persistence of the impacts of unexpected announcements and releases on volatility, but also on any
SC
The EGARCH (1,1) model is specified by the following conditional mean and variance
MA NU
equations:
(3)
(4)
ED
where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract) using ten minute intervals from t-10 to t, Rt-1 represents the ten-minute lagged implied
PT
return (return), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release, and dt is a vector of dummy variables that take
CE
the value of one in each ten minute interval t (from t-10 to t+60), or zero otherwise.
AC
The interaction term (dt(0,9)×it) indicates the magnitude of the mean response to unexpected announcements / releases and the dummy variable dt indicates the timing of the volatility response. Further, the magnitude of the volatility response is indicated by the significance and sign of β1, persistence by β and any extant asymmetry by β2.
19
After confirmation of the presence of an ARCH effect in the returns of the ASX SPI200 futures contract and the implied returns of the S&P/ASX 200 Index, comparison of the Akaike information criterion (AIC), Schwarz information criterion (SIC) and log likelihood function supports the use an EGARCH model with a Student t distribution. Additionally this distribution has no remaining ARCH effects or serial correlation. 20
This is necessary to test for Black’s (1976) ‘leverage effect’, whether negative shocks in the equity market generate more volatility than positive shocks.
13
ACCEPTED MANUSCRIPT 2.3 Determining the channels of monetary policy in the Australian equity market To examine the exchange and interest rate channels of monetary policy in the Australian
T
equity market we test for a differential impact in multinational companies and cyclical industries,
RI P
respectively. Further, inconsistency in the response of equity returns to monetary policy due to a firm’s financial position and economic cycles is examined in order to ascertain evidence of the credit
MA NU
SC
channels of monetary policy, namely the balance sheet and bank loan channels respectively.
2.3.1 The exchange rate channel of monetary policy Monetary policy is proposed to operate through the exchange rate channel of monetary policy when changes to or revised expectations of the target interbank cash rate influence demand
ED
for domestic deposits (RBA, 2014). The change in demand for domestic deposits has a direct impact
PT
on foreign exchange prices, which in turn affects aggregate demand, net exports and asset prices. To test whether monetary policy affects equity returns via the exchange rate channel, the impact of
CE
monetary policy is compared across domestic firms (those firms with no exchange risk exposure) and multinational firms (those firms with exchange risk exposure). 21 If the exchange rate channel is
AC
operating in the Australian equity market, multinational firms should demonstrate a larger response to monetary policy.
Consistent with Choi and Prasad (1995), a multinational firm is defined as a firm with a market capitalisation of $1 million or more which possesses foreign assets or generates foreign revenue that comprise 25% or more of their respective balance sheet totals. Disaggregated panel data based on the constituents of the S&P/ASX 200 Index constitute the basis of this analysis which is performed via the following equation: (5) 21
Exchange risk exposure refers to a firm’s susceptibility to fluctuations in exchange rates which may affect the value of a firm through transaction, translation and economic risk factors.
14
ACCEPTED MANUSCRIPT
where Ri,t represents the return of firm i using ten minute intervals (t0,9 - t-10,-1), it represents the
T
unexpected component of the monetary policy announcement and separately the explanatory
RI P
minutes’ release and the dummy variable dMN is equal to one for a multinational firm, determined by the proportion of foreign-held assets or foreign-generated revenue, or zero otherwise.
SC
If the impact of monetary policy on multinational firms is shown to be larger, as represented
MA NU
by a negative and significant coefficient at β3, this will indicate the presence of the exchange rate channel of monetary policy in the Australian equity market.
To determine whether the exchange rate channel is more prevalent in particular sectors and firm sizes, the sample is partitioned based on the eleven S&P/ASX 200 sectors and three size
ED
portfolios (small: lowest tercile of companies by market capitalisation, medium: next tercile of companies by market capitalisation, large: largest tercile of companies by market capitalisation).
(6) (7)
AC
CE
PT
Differences are tested using the following equations:
where dsector is a vector of dummy variables set equal to one for each S&P/ASX 200 sector or zero otherwise, and dsize is a vector of dummy variables set equal to one for each size portfolio or zero otherwise. To avoid perfect multicollinearity, the materials sector and small size portfolio are omitted from the equations. Therefore the response of multinational firms in this sector and size portfolio respectively will be indicated by the coefficient at β3. For all other sectors and size portfolios, differences in the impact of monetary policy on multinational firms will be indicated by a significant coefficient at β5.
15
ACCEPTED MANUSCRIPT 2.3.2
The interest rate channel of monetary policy Monetary policy is proposed to operate through the interest rate channel of monetary policy
T
when changes to or revised expectations of the target interbank cash rate influence real interest
RI P
rates (RBA, 2014). This in turn affects a firm’s cost of capital, alters spending patterns and ultimately aggregate demand and asset prices. To test whether monetary policy affects equity returns via the
SC
interest rate channel, the impact of monetary policy is compared across cyclical and non-cyclical industries. If the interest rate channel is pervasive in the Australian equity market, industries that
MA NU
are cyclical should have a stronger response to monetary policy.
In order to ascertain a ranked order of cyclicality of Australian industries this study employs a methodology consistent with Peterson and Strongin (1996), which defines the cyclicality of an
ED
industry as β in the following equation:
(8)
PT
where Ri,t represents the implied return of the S&P/ASX 200 sector index i and GNIt represents the
CE
latest percentage change in Australian gross national income (GNI). The coefficient β in this context measures the sensitivity of each sector index i to cyclical changes of the GNI and thus by ordering
cyclicality.22
AC
the magnitude of this coefficient from each of the eleven sector indices establishes a ranked order of
The ranked order of cyclicality is then compared and contrasted with the ranked order of the response to unexpected monetary policy announcements and explanatory minutes’ releases for each sector index i as determined by the following equation: (9)
22
This empirical identification of cyclical industries is believed to be a more robust method of determining evidence of the interest rate channel of monetary policy, as opposed to prior studies that use arbitrary measures of cyclicality (for example Bernanke and Kuttner, 2003; Ehrmann and Fratzscher, 2004; Basistha and Kurov, 2008).
16
ACCEPTED MANUSCRIPT where Ri,t represents the implied return of the S&P/ASX 200 sector index i using ten minute intervals (t0,9 - t-10,-1) and it represents the unexpected component of the monetary policy announcement
T
and separately the explanatory minutes’ release. The coefficient β in this context measures the
RI P
response of each sector index i to unexpected monetary policy announcements and separately explanatory minutes’ releases and thus by ordering the magnitude of this coefficient from each of
SC
the eleven sector indices establishes a ranked order of response. To compare the two ranked
MA NU
datasets a Spearman rank correlation test is employed and to contrast, a Wilcoxon signed rank test. If the ranked order of cyclicality is correlated or not statistically different to the ranked order of response, it can be inferred that the response of cyclical industries to monetary policy announcements and releases is stronger, thereby confirming the presence of the interest rate
The credit channel of monetary policy
PT
2.3.3
ED
channel of monetary policy.
CE
Monetary policy is proposed to operate through the credit channel of monetary policy when changes to or revised expectations of the target interbank cash rate affects a firm’s external finance
AC
premium23 and thus its value (Bernanke and Gertler, 1995). This effect on equity returns operates via two distinct channels. The first, the balance sheet channel, occurs when changes to monetary policy affects a firm’s financial position (for example their balance sheet, income statement and cash flow statement), which in turn affects the firm’s borrowing capacity, its ability to obtain external finance and ultimately its value. Due to their heavy reliance on external debt, financially constrained firms are believed to be most susceptible to this channel of monetary policy and their response duly amplified (Ehrmann and Fratzscher, 2004). To test whether monetary policy affects equity returns
23
The external finance premium is the additional cost incurred by firms raising funds externally (by issuing shares or debt) as opposed to costs from raising funds internally (via earnings).
17
ACCEPTED MANUSCRIPT via the balance sheet channel, the response of financially constrained and unconstrained firms to both monetary policy announcements and explanatory releases are compared.
T
The second channel, the bank lending channel, focuses on the effect monetary policy has on
RI P
the availability and cost of loans.24 As loan availability is generally pro-cyclical, a firm’s response to monetary policy should be affected by economic cycles. To test whether monetary policy affects
SC
equity returns via the bank loan channel, a firm’s response to monetary policy is compared across different phases of an economic cycle.
MA NU
As both the balance sheet and bank loan channels of monetary policy require the use of firm-specific data, disaggregated panel data based on the constituents of the S&P/ASX 200 Index forms the basis for this analysis.
ED
Balance sheet channel
To test for the presence of the balance sheet channel, this study follows the methodology of
CE
PT
Basistha and Kurov (2008) and estimates the following equation: (10)
AC
where Ri,t represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1) and it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release. The dummy variable dFC is set equal to one for firms that have been identified as financially constrained, and zero otherwise. Consistent with Ehrmann and Fratzscher (2004) and Basistha and Kurov (2008) a firm is identified as financially constrained based on multiple proxies from financial statement data25 to address any errors in the variables. These proxies include
24
Deng and Liu (2014) provide evidence of this effect in Australian banks. However, Salah and Fedhila (2014) assert that the use of securitisation as a substitute for liquid assets and the increase in capital requirements to “insure the solidarity of the banking system” (pg.182) has resulted in a reduction in effectiveness of monetary policy to influence bank lending. 25 By using predetermined annual data to construct financial constraint proxies issues of simultaneity are avoided as the data is exogenous to intraday stock returns.
18
ACCEPTED MANUSCRIPT a firm’s size, short-term to total debt ratio, interest coverage ratio, dividend yield, book to market ratio, debt to equity ratio and liability to assets ratio.
T
Firm size based on market capitalisation is a commonly used proxy for financial constraint
RI P
(Ehrmann and Fratzscher, 2004; Peersman and Smets, 2005; Basistha and Kurov, 2008), with smaller firms identified as having limited access to alternative forms of finance due to information, agency
SC
and borrowing costs. This study therefore classifies the bottom quartile26 of firms ranked on market value as financially constrained. Additionally, this study classifies the top quartile of firms ranked
MA NU
according to the ratio of short-term debt to total debt and the bottom quartile of firms ranked by the interest coverage ratio as financially constrained. These firms are more financially constrained due to their reliance on short term debt and a lack of liquidity (Peersman and Smets, 2005). The top quartile of firms ranked according to their dividend yield, are also classified as
ED
financially constrained. This classification is due to the sensitivity of such firms to revisions in earnings expectations based on changes to monetary policy (Ehrmann and Fratzscher, 2004). For
PT
example, a firm with a high dividend yield may find it difficult to maintain these dividends if
CE
monetary policy contracts and interest rates rise. Value firms are considered to be more financially constrained than growth firms due to their
AC
high level of interest rate risk (Maio, 2014).27 Therefore the top quartile of firms, ranked on their book to market ratio, are classified as financially constrained. Finally, highly leveraged firms or firms from the top quartile of the leverage ratios, debt to equity and liability to assets, are classified as financially constrained. This is based on the assumption that highly leveraged firms experience greater difficulties obtaining and maintaining external finance and therefore are more financially constrained (Peersman and Smets, 2005).
26
Various portfolio structures were tested including a 30/40/30 and 10/80/10 split as well as equally weighted and value weighted portfolios. All alternatives yielded similar results. 27
Maio (2014) claims that “value stocks have more negative betas against short-term interest rates than growth stocks” (pg. 3) and therefore are more sensitive to monetary policy.
19
ACCEPTED MANUSCRIPT As well as undertaking portfolio analysis, a series of cross-sectional regressions are used to measure the continuous relationship between each of the seven financial constraint proxies and
RI P
T
equity returns, as per the following equation: (11)
SC
where Ri,t represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1) and it represents the unexpected component of the monetary policy announcement and separately the
MA NU
explanatory minutes’ release. The variable FCv,i is a vector of continuous variables used to proxy for financial constraint based on company i’s size, short-term to total debt ratio, interest coverage ratio, dividend yield, book to market, debt to equity and liability to assets ratios, each estimated separately.
ED
The presence of the balance sheet channel of monetary policy would be confirmed by a
PT
significant coefficient at β2 and / or β3 in Equations 10 or 11. These values represent the additional impact of unexpected monetary policy announcements or explanatory minutes’ releases on
AC
Bank loan channel
CE
financially constrained firms.
To test for the presence of the bank loan channel, in addition to the balance sheet channel, this study again applies the methodology of Basistha and Kurov (2008) and includes an additional independent variable in Equations 10 and 11 to account for alternating economic cycles, as per the following equations: (12) (13)
20
ACCEPTED MANUSCRIPT where the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and
T
is set to zero otherwise.28
RI P
The Global Financial Crisis period is defined using both an exogenous source (ABS, 2013) and a Bai and Perron (1998) breakpoint test. The former defines the Global Financial
SC
Crisis period as July 2008 to March 2009; and the latter as the 3rd of September, 2007 to the 9th of March, 2009. An expansionary (contractionary) phase of the business cycle is
MA NU
identified when the twelve month moving average of the OECD leading indicator index for Australia is greater than (below) the index value at the time of the announcement or release and a contractionary (expansionary) monetary policy regime when the target interbank cash
ED
rate is rising (falling).
If crisis (contractionary) periods are shown to affect the impact of unexpected monetary
PT
policy announcements and explanatory minutes’ releases, providing evidence of the bank loan
CE
channel, significance should be found for the coefficients at β2 and / or β3. Significant coefficients at β4 and β5 will represent the additional impact of unexpected monetary policy announcements or
AC
explanatory minutes’ releases on financially constrained firms during normal times and a significant coefficient at β6, will represent any additional impact during crisis (contractionary) periods. It is expected that the response of financially constrained firms will be amplified in crisis (contractionary) periods if the balance sheet channel is prevalent (Basistha and Kurov, 2008).
3
Results This section is divided into two parts. First the impact of unexpected monetary policy
announcements and explanatory minutes’ releases on the Australian equity market is examined in
28
Basistha and Kurov (2008) also include an industry dummy in this regression, however for brevity this dummy is excluded from this analysis. Estimation of this equation including the dummy industry variable yields similar results to those reported.
21
ACCEPTED MANUSCRIPT Section 3.1. Secondly, in Section 3.2 this study determines the channels of monetary policy in the
3.1
MA NU
SC
RI P
T
Australian equity market.
Response to unexpected monetary policy announcements and explanatory
PT
3.1.1 Impact on return
ED
minutes’ releases
The results presented in Table 1, Panel A demonstrate that the impact of unexpected
CE
monetary policy announcements and explanatory minutes’ releases on the Australian equity market
AC
is immediate (within ten minutes), negative and significant.29
Specifically, an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to a 0.1149% decrease (increase) in the return of the ASX SPI200 futures contract and a 0.0645% decrease (increase) in the implied return of the S&P/ASX 200 Index. As the RBA generally increases or decreases the target interbank cash rate in 25 basis point increments, this result may be
29
These results are consistent with extant international studies (Bernanke and Kuttner, 2003; Ehrmann and Fratzscher, 2004; Basistha and Kurov, 2008) that document a negative relationship between unexpected target cash rate changes and stock prices.
22
ACCEPTED MANUSCRIPT contextualised as an unexpected 25 basis point tightening (easing) prompting a 0.0287% decrease (increase) in the ASX SPI200 futures contract price and a 0.0161% decrease (increase) in the
RI P
these findings, despite the change to the announcement time.30
T
S&P/ASX 200 Index. The results from the two sub sample periods presented in Panel B and C confirm
Similarly, an unexpected 100 basis point increase (decrease), derived from the information
SC
content of the explanatory minutes, leads to a 0.2441% decrease (increase) in the ASX SPI200
MA NU
futures contract and a 0.2073% decrease (increase) in the S&P/ASX 200 Index.
3.1.2 Differential impact of unexpected monetary policy announcements and explanatory minutes’ releases To test whether the unexpected information content of an explanatory minutes’ release
ED
elicits a distinct response from the Australian equity market when compared to an unexpected
PT
monetary policy announcement, we examine the differential impact of monetary policy announcements and explanatory minutes’ releases on the Australian equity market, as reported in
CE
Table 2.
AC
The absence of significance on the dummy variable (β2) and interacted term (β3) for both the ASX SPI200 futures contract and S&P/ASX 200 Index demonstrates that there is no significant difference in the impact of unexpected monetary policy announcements and explanatory minutes’ releases on Australian equity market returns. This suggests that there is no difference between monetary policy actions and statements in terms of their ability to move market prices and
30
As a further robustness test, additional regression analysis was performed to compare the results of the pre and post sample, particularly due to the difference in magnitude of the coefficients. This analysis found no statistically significant difference between the pre and post periods.
23
ACCEPTED MANUSCRIPT moderate economic activity. This finding has significant implications for central bank officials
T
regarding the application of monetary policy to achieve a target cash rate.
RI P
3.1.3 Impact on volatility
The results of the EGARCH model, reported in Table 3, indicate that monetary policy
SC
announcements and explanatory minutes’ releases elicit a significant change in the volatility of the
MA NU
Australian equity market.
ED
The magnitude (β1) and persistence (β) of volatility following a monetary policy announcement and explanatory minutes’ release is shown to be significant and comparable.
PT
Specifically, the magnitude following an unexpected monetary policy announcement (explanatory minutes’ release) using the ASX SPI200 futures contract is 0.4304 (0.4190) and the persistence is
CE
0.7903 (0.8240). Of note, the response of the S&P/ASX 200 Index is larger, with a magnitude of
AC
7.5127 (7.5343). Further, the absence of significance at β2 denotes that the response is symmetric. That is, both positive and negative shocks generate the same level of volatility in the Australian equity market.31
The timing of the response, as indicated by the sign and significance of the dummy variable dt is shown to vary between the two events and the two equity market proxies. Specifically, volatility in the ASX SPI200 futures contract is elevated in the ten minutes prior to the monetary policy announcement (t-10,-1), reaching a maximum at event time (t0-9) and returning to normal levels after forty minutes. The impact of the explanatory minutes’ release is however not as lengthy, with the statistically significant increase in volatility limited to the first ten minutes after the release. 31
Of note, the coefficient of β2 is generally negative, which implies (although not statistically significant) that negative shocks generate more volatility in the Australian equity market. This interpretation is consistent with Black’s (1976) ‘leverage effect’.
24
ACCEPTED MANUSCRIPT Finally, using the S&P/ASX 200 Index, this study finds a statistically significant increase in volatility in the ten minutes after monetary policy announcements, but no evidence of abnormal
T
volatility in the ensuing ten minute intervals. In contrast, there is no evidence of a significant change
RI P
in the volatility of the S&P/ASX 200 Index after explanatory minutes’ releases. Assessed together, the evidence suggests that the monetary policy announcement has a more protracted impact on
SC
volatility than the explanatory minutes’ release in the Australian equity market. This suggests that unexpected central bank actions, rather than statements, are more disruptive in the Australian
MA NU
equity market.
ED
3.2 Determining the channels of monetary policy in the Australian equity market
3.2.1 The exchange rate channel of monetary policy
PT
Table 4 reports that multinational firms have a greater sensitivity to monetary policy announcements and explanatory minutes’ releases as demonstrated by a significantly larger
CE
response. This result supports the notion that Australian monetary policy acts through the exchange
AC
rate channel, affecting equity prices via its impact on exchange rates, potentially due to the openness of the Australian economy.32
This result is contrary to the findings of Peersman and Smets (2005) for members of the European Union, who find no evidence of the exchange rate channel, and is shown in Panel A by negative and significant coefficients at β3 for both multinational firm proxies (assets and revenue) when examining the impact of the monetary policy announcement. Specifically, these results 32
According to the OECD ‘Trade Openness’ measure, the average of total exports and imports as a percentage of GDP, Australia (20.1%) is a far more open economy than the US (12.6%).
25
ACCEPTED MANUSCRIPT demonstrate that an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to a 0.0850% decrease (increase) in the returns of domestic firms, plus an additional 0.0314%
T
decrease (increase) in the returns of multinational firms identified using the percentage of foreign
RI P
held assets. Similarly, an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to a 0.0898% decrease (increase) in the returns of domestic firms, plus an additional
SC
0.0193% decrease (increase) in the returns of multinational firms identified using the percentage of foreign generated revenue. Further, the response of the Australian equity market to an explanatory
MA NU
minutes’ release is shown to be driven by multinational firms who have in excess of 25% of their revenue generated overseas.
Partitioning of the sample into sectors, using foreign held assets as the multinational firm proxy, to examine the impact of the monetary policy announcement (reported in Panel B)
ED
demonstrates that the AREITS and utilities sectors are significantly more exposed to the exchange rate channel, whilst the consumer staples and information technology sectors are significantly less
PT
exposed. This is indicated by the negative (positive) and significant coefficients of the AREITS and
CE
utilities (consumer staples and information technology) sectors at β5, which when added to the β1 and β3 coefficients indicates a more amplified (muted) response.
AC
Further partitioning of the sample based on the size of the firm (reported in Panel C) demonstrates that small (0.0969%) firms have a larger exposure to the exchange rate channel than medium (0.0248%) and large (0.0101%) firms. This result is confirmed when using foreign generated revenue as the multinational firm proxy and could be explained by the superior ability of larger firms to hedge exchange rate risk exposures. Conversely, partitioning of the sample into sectors and firm sizes presents no significantly comparable results for explanatory minutes’ releases. This could however be a result of the reduced
26
ACCEPTED MANUSCRIPT sample size as results, although not significant, are consistent in direction and magnitude to those
RI P
3.2.2 The interest rate channel of monetary policy
T
reported for the monetary policy announcement.33
SC
Table 5 reports that cyclical industries have a greater sensitivity to monetary policy announcements and explanatory minutes’ releases. This result supports the notion that monetary
MA NU
policy acts through the interest rate channel, affecting equity prices via its impact on interest rates.
ED
This is demonstrated in Panel C of Table 5 where a strong positive correlation (0.78) is
PT
reported between the ranked response (highest to lowest) of each S&P/ASX 200 sector to monetary policy announcements and the ranked response (highest to lowest) of each S&P/ASX200 sector to
CE
Australia’s gross national income (GNI), which provides a ranked order of cyclicality.34 These results indicate that sectors with the largest response to monetary policy announcements also tend to be
AC
the most cyclical sectors. The differential impact of monetary policy across sectors with different sensitivities to the broad economy is confirmed using a Wilcoxon signed rank test which reports an insignificant z score of -0.94. This suggests that there is no significant difference between the two ranked datasets: the ranked order of response and the ranked order of cyclicality. The correlation between the ranked response of each S&P/ASX 200 sector to explanatory minutes’ releases and the ranked response (highest to lowest) of each S&P/ASX 200 sector to
33
The sample for monetary policy announcements extends from October 2003 to October 2013 and comprises 111 announcements. The sample for explanatory minutes’ releases extends from December 2007 to October 2013 and comprises 65 announcements. 34
Panel A and B of Table 5 report the response of each S&P/ASX 200 sector to monetary policy announcements, explanatory minutes’ releases and Australia’s gross national income (GNI).
27
ACCEPTED MANUSCRIPT Australia’s gross national income (GNI), is relatively weak (0.22) but the direction is consistent. Further, the Wilcoxon signed rank test confirms that there is no significant difference between the
RI P
T
two rankings, with an insignificant z-score of 0.24.
SC
3.2.3 The credit channel of monetary policy
The credit channel of monetary policy consists of two distinct channels: the balance sheet
MA NU
channel and the bank loan channel. Whilst this study provides evidence in Tables 6 to 10 of both channels of monetary policy, demonstrated by the significantly larger response of financially constrained firms (balance sheet channel) and firms during crisis and contractionary periods (bank loan channel), the bank loan channel appears to be the most prevalent. This result supports the
ED
notion that monetary policy acts through the credit channel, affecting equity prices via its impact on
PT
interest rates which in turn affect a firm’s financial position and loan availability. Based on the methodology of Basistha and Kurov (2008), this study fails to find any evidence
CE
of the balance sheet channel of monetary policy in the Australian equity market, as reported in Panel A (monetary policy announcement) and Panel B (explanatory minutes’ release) of Table 6. This
AC
is demonstrated by the insignificance of the coefficients at β2 and β3 for the majority of the financially constrained portfolios.35 Where significance is reported, in the size (0.0168*) portfolio, the coefficient is positive and therefore indicates that the impact of unexpected monetary policy announcements on this portfolio is weaker. Alternatively, as there is only evidence of significance in one out of the seven subsamples, this result could be attributed to type 1 error.
35
This result is consistent with Warner and Georges (2001) who report no evidence of the balance sheet channel in stock returns. Of note, the sample period examined by Warner and Georges (2001), 1990 to 1991, covered the US credit crunch, whereas the sample period in this study includes the Global Financial crisis, both occasions when theoretically the response from financially constrained firms should be amplified.
28
ACCEPTED MANUSCRIPT
The use of a continuous variable, rather than portfolios, to identify financially constrained
T
firms however yields some evidence of the balance sheet channel of monetary policy in the
RI P
Australian equity market. This is reported in Panel C of Table 6. Specifically these results indicate that an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to an
SC
additional 0.0325%, 0.0077%, 0.0382% decrease (increase) in the returns of financially constrained firms based on their book to market, dividend yield and liability to assets ratio respectively.
MA NU
Conversely, explanatory minutes’ releases do not appear to affect equity prices through the balance sheet channel, as financially constrained firms do not elicit a stronger reaction to explanatory minutes’ releases in any of the portfolios examined in Panel D of Table 6.
ED
In contrast, irrespective of the proxy used to account for alternating economic cycles: the Global Financial Crisis (endogenously or exogenously defined); phases of the business cycle or
PT
monetary policy regimes, evidence of the bank loan channel of monetary policy is present in the Australian equity market. This is demonstrated initially by the negative and significant coefficients of
CE
β2 and β3 in Panels A, B and C of Table 7 which reports the additional impact of monetary policy
(2008).
AC
announcements in crisis and contractionary periods using the methodology of Basistha and Kurov
Specifically, these results demonstrate that an unexpected 100 basis point tightening of the target interbank cash rate led to a decrease in the returns of firms of 0.2799% (0.3614%) during the Global Financial Crisis and 0.0399% (0.0399%) during non-crisis periods. This represents an additional decrease in the returns of firms of 0.2400% (0.3215%) during the Global Financial Crisis, as defined endogenously (exogenously). Similarly, the returns of firms during a contractionary phase in
29
ACCEPTED MANUSCRIPT the business cycle (contractionary monetary policy regime) decrease by an additional 0.0775% (0.0905%).
T
Supplementary analysis, conducted to examine the additional impact of unexpected
RI P
monetary policy announcements or explanatory minutes’ releases on financially constrained firms during normal times (Δit×dFC) and during crisis and contractionary periods (Δit×dFC× dEC), failed to
SC
provide any evidence of the balance sheet channel of monetary policy.36 This is demonstrated by insignificant coefficients at β5 and β6 and is consistent with earlier findings which fail to confirm the
MA NU
presence of the balance sheet channel of monetary policy in the Australian equity market using the methodology of Basitha and Kurov (2008).
Further, for robustness, the impact of monetary policy announcements on the returns of
ED
financially constrained firms during crisis and contractionary periods is examined using a continuous variable rather than portfolios to identify financially constrained firms. These results are reported in
CE
PT
Table 8.
AC
As before these results confirm the presence of the bank loan channel with negative and significant coefficients reported at β2 and β3. However the lack of significance at β5 and β6 fails to confirm the presence of the balance sheet channel with only the dividend yield and book to market proxies suggesting some form of amplified response. Repeating this analysis using explanatory minutes’ releases also yields similar results. These results are reported in Table 9 using financially constrained portfolios consistent with Basistha and Kurov (2008) and a continuous variable for the financial constraint proxies in Table 10. 36
It is expected that the response of financially constrained firms will be amplified in crisis and contractionary periods if the balance sheet channel is prevalent (Basistha and Kurov, 2008).
30
ACCEPTED MANUSCRIPT
T
RI P
The results reported in Tables 9 and 10 provide evidence of the bank loan channel during the Global Financial Crisis (Panel A) as indicated by significant and negative coefficients at β2 and β3, but
SC
no similarly robust results during a contractionary phase of the business cycle (Panel B) or a contractionary monetary policy regime (Panels C). What is obvious however, is the absence of proof
MA NU
for the balance sheet channel of monetary policy as denoted by the absence of significance at β5 and β6, irrespective of the methodology used to measure a firm’s financial constraint: portfolios (Table 9)
4
ED
or a continuous variable (Table 10).
Summary
PT
This paper investigates the channels of monetary policy by firstly examining the impact of
CE
central bank actions (monetary policy announcements) and statements (explanatory minutes’ releases) in the Australian equity market and secondly, by determining and comparing the channels
AC
of monetary policy triggered by these events. Using data from October 2003 to October 2013 this study finds that both monetary policy announcements and explanatory minutes’ releases have a significant impact on the returns of the Australian equity market. Specifically, an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to a 0.1149% decrease (increase) in the return of the ASX SPI200 futures contract and a 0.0645% decrease (increase) in the implied return of the S&P/ASX 200 Index. Similarly, an unexpected 100 basis point increase (decrease), derived from the information content of the explanatory minutes, leads to a 0.2441% decrease (increase) in the return of the ASX SPI200 futures contract and a 0.2073% decrease (increase) in the implied return of the S&P/ASX 200 Index. When the impacts of these two events are statistically compared, no discernible difference is found.
31
ACCEPTED MANUSCRIPT Further, the magnitude and persistence of the volatility response to monetary policy announcements and explanatory minutes’ releases are significant, comparable and symmetric. The
T
timing of the volatility response however is shown to vary between the two events and the two
impact on volatility than the explanatory minutes’ release.
RI P
equity market proxies, with the monetary policy announcement demonstrating a more protracted
SC
Finally, distinct from US and European studies that find strong evidence of the interest rate, bank loan and balance sheet channel (Bernanke and Blinder, 1992; Dedola and Lippi, 2000; Bernanke
MA NU
and Kuttner, 2003; Ehrmann and Fratzscher, 2004; Bernanke and Kuttner, 2005; Basistha and Kurov, 2008; Maio, 2014) and no evidence of the exchange rate channel (Peersman and Smets, 2005), this paper finds that monetary policy impacts the Australian equity market via the exchange rate, interest rate and bank loan channels of monetary policy, with only weak evidence of the balance
ED
sheet channel of monetary policy. These channels are found to be operating irrespective of the trigger (monetary policy announcement or explanatory minutes’ release), though results are
PT
somewhat weaker when examining the explanatory minutes’ release, with the identification of the
CE
exchange rate channel posited to be due to the openness of the Australian economy.
AC
Collectively these results suggest that central bank actions and statements have a synonymous ability to move market prices and moderate economic activity via all three channels of monetary policy: the exchange rate, interest rate and credit channels Consequently, these findings have significant implications for central bank officials regarding the application of monetary policy to achieve a target cash rate, for this practice, previously thought to be constrained to a single monthly announcement, is demonstrated to be equally affected by the written word as suggested by Oros and Zimmer (2015)37. Moreover the explication of the impact of monetary policy on the Australian equity market provides a valuable resource for financial market participants by comprehensively explaining market response.
37
Oros and Zimmer (2015) suggest that central bank communication could be used to influence expectations and macroeconomic outcomes.
32
ACCEPTED MANUSCRIPT References Australian Prudential Regulatory Authority (APRA) 2015, List of Authorised Deposit-Taking Institutions, Sydney Australia, last viewed 13 March 2015, http://www.apra.gov.au/adi/pages/adilist.aspx
RI P
T
Australian Bureau of Statistics (ABS) 2013, The Global Financial Crisis and its Impact on Australia 2013, Canberra Australia, last viewed 6 August 2013, http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/1301.0Chapter27092009%E2%80%9310
SC
Bai, J & Perron, P, 1998, “Estimating and Testing Linear Models with Multiple Structural Changes”, Econometrica, vol. 66, no. 1, pp. 47-78.
MA NU
Basistha, A & Kurov, A, 2008, “Macroeconomic Cycles and the Stock Market’s Reaction to Monetary Policy”, Journal of Banking and Finance, vol. 32, pp. 2606-2616. Bernanke, B & Blinder, A, 1992, “The Federal Funds Rate and the Channels of Monetary Transmission”, American Economic Review, vol. 82, pp. 901-921. Bernanke, B & Gertler, M, 1995, “Inside the Black Box: The Credit Channel of Monetary Policy Transmission”, Journal of Economic Perspectives, vol. 9, no. 4, pp. 27-48.
ED
Bernanke, B & Kuttner, K, 2003, “What Explains the Stock Market’s Reaction to Federal Reserve Policy?”, Mimeo, Board of Governors and Federal Reserve Bank of New York.
PT
Bernanke, B & Kuttner, K, 2005, “What Explains the Stock Market’s Reaction to Federal Reserve Policy?”, The Journal of Finance, vol. 60, no. 3, pp. 1221-1257.
CE
Black, F, 1976, “Studies of Stock Price Volatility Changes”, Proceedings of the Business and Economics Section of the American Statistical Association, pp. 177–181.
AC
Choi, J & Prasad, A, 1995, “Exchange Risk Sensitivity and Its Determinants: A Firm and Industry Analysis of U.S. Multinationals”, Financial Management, vol. 24, no. 3, pp. 77-88. Central Intelligence Agency (CIA) 2015, The World Fact Book, Washington, USA, last viewed 13 March 2015, https://www.cia.gov/library/publications/the-world-factbook/geos/as.html Dedola, L & Lippi, F, 2000, “The Monetary Transmission Mechanism: Evidence from the Industry Data of Five OECD Countries”, European Economic Review, vol. 49, no. 6, pp. 1543-1569. Deng, X & Liu, L, 2014, “The Bank Lending Channel: Evidence from Australia”, Australasian Accounting, Business and Finance Journal, vol. 8, no. 2, pp. 71-87. Ehrmann, M & Fratzscher, M, 2004, “Taking Stock: Monetary Policy Transmission to Equity Markets”, Journal of Money, Credit and Banking, vol. 36, no. 4, pp. 719-737.
European Central Bank, 2014, Current Issues and Challenges for Central Bank Communication, Frankfurt Germany, last viewed 30 July 2014,
33
ACCEPTED MANUSCRIPT Federal Deposit Insurance Corporation (FDIC) 2015, Key Statistics, Kansas City US, last viewed 13 March 2015, https://www2.fdic.gov/idasp/KeyStatistics.asp?tdate=3/5/2015&pDate=3/4/2015
RI P
T
Georgiadis, G, 2014, “Towards an Explanation of Cross-Country Asymmetries in Monetary Transmission”, Journal of Macroeconomics, vol. 39, pp. 66-84. Guraynak, R, Sack, B & Swanson, E, 2005, “Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Action and Statements”, International Journal of Central Banking, vol. 1, pp. 55-93.
MA NU
SC
Kim, S & Nguyen, D, 2008, “The Reaction of the Australian Financial Markets to the Interest Rate News from the Reserve Bank of Australia and the U.S. Fed”, Research in International Business and Finance, vol. 22, no.3, pp. 378-395. Kuttner, K, 2001, “Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market”, Journal of Monetary Economics, vol. 47, pp. 523-544. Maio, P, 2014, “Another look at the Stock Return Response to Monetary Policy Actions”, Review of Finance, pp. 1-51.
ED
McCredie, B, Docherty, P, Easton, S & Uylangco, K, 2014, “The Differential Impact of Monetary Policy Announcements and Explanatory Minutes Releases on the Australian Interest Rate Futures Market” Pacific-Basin Finance Journal, vol. 29, pp. 261-271.
PT
Nelson, D, 1991, “Conditional Heteroskedasticity in Asset Returns: A New Approach”, Econometrica, vol. 59, no. 2, pp. 347-370.
AC
CE
Organisation for Economic Co-operation and Development (OECD) 2015, Trade Openness, Paris France, last viewed 13 March 2015, http://www.oecdilibrary.org/docserver/download/9211041ec060.pdf?expires=1426404838&id=id&accname=guest& checksum=32309BB5BD92F075DAF90E0ABAAC40E1 Oros, C & Zimmer, B, 2015, “Uncertainty and Fiscal Policy in a Monetary Union: Why does Monetary Policy Transmission Matter?”, Economic Modelling, vol. 50, pp. 85-93. Peersman, G & Smets, F, 2005, “The Industry Effects of Monetary Policy in the Euro Area”, Economic Journal, vol. 115, no. 503, pp. 319-342. Peterson, B & Strongin, S, 1996, “Why Are Some Industries More Cyclical Than Others?”, Journal of Business and Economic Statistics, vol. 14, no. 2, pp. 189-198. Reserve Bank of Australia (RBA), 2014, Monetary Policy, Sydney Australia, last viewed 23 July 2014,. Rosa, C, 2011, “Words that Shake Traders. The Stock Market’s Reaction to Central Bank Communication in Real Time”, Journal of Empirical Finance, vol. 18, pp. 915-934. Salah, N & Fedhila, H, 2014, “The Effect of Securitization on US Bank Lending and Monetary Policy Transmission”, Studies in Economics and Finance, vol. 31, no. 2, pp. 168-185.
34
ACCEPTED MANUSCRIPT Smales, L, 2012a, “RBA Monetary Policy Communication: The Response of Australian Interest Rate Futures to Changes in RBA Monetary Policy”, Pacific-Basin Finance Journal, vol. 20, no. 5, pp. 793808.
RI P
T
Smales, L, 2012b, “30-Day Interbank Futures: Investigating the Process of Price Discovery Following RBA Cash Target Rate Announcements”, Journal of International Financial Markets, Institutions and Money, vol. 22, pp. 1006-1023.
AC
CE
PT
ED
MA NU
SC
Warner, E & Georges, C, 2001, “The Credit Channel of Monetary Policy Transmission: Evidence from Stock Returns”, Economic Inquiry, vol.30, no.1 pp.74-85.
35
ACCEPTED MANUSCRIPT Tables Table 1 The impact of unexpected monetary policy announcements and explanatory minutes’ releases on the Australian equity market.
Explanatory Minutes’ Release 2 R 0.0533 0.0739* -0.2073* 0.0994 0.0000 0.0001 0.0005 -0.0094 0.0114 -0.0368 0.0183 0.0589 0.0121 0.0355 63
AC
CE
PT
ED
MA NU
SC
RI P
T
Panel A – Full Sample Time to ASX SPI200 futures contract S&P/ASX 200 Index announcement Monetary Policy Explanatory Monetary Policy Announcement Minutes’ Release Announcement 2 2 2 R R R 0.0180 0.0333 0.0423 0.0290 -0.0048 0.0072 βit(-10,-1) -0.1149** 0.2050 -0.2441** 0.1848 -0.0645** 0.2225 βit (0,9) -0.0136 0.0047 0.0132 0.0010 -0.0097 0.0075 βit (10,19) 0.0011 0.0000 0.0418 0.0130 0.0100 0.0113 βit (20,29) 0.0210 0.0144 -0.0074 0.0004 -0.0047 0.0032 βit (30,39) -0.0178 0.0208 0.1012 0.0638 -0.0007 0.0001 βit (40,49) -0.0259 0.0399 0.0842* 0.0837 -0.0134 0.0288 βit (50,59) n 71 40 63 Panel B – Pre sample from October 2003 to December 2007 0.0151 0.0366 βit(-10,-1) -0.1809** 0.2092 βit (0,9) -0.0523 0.0594 βit (10,19) -0.0493 0.0342 βit (20,29) 0.0870 0.1338 βit (30,39) 0.0013 0.0001 βit (40,49) 0.0091 0.0055 βit (50,59) n 33 Panel C – Post sample from February 2008 to October 2013 0.0129 0.0140 βit(-10,-1) -0.1072** 0.2240 βit (0,9) -0.0080 0.0014 βit (10,19) 0.0215 0.0168 βit (20,29) 0.0234 0.0195 βit (30,39) -0.0358 0.0855 βit (40,49) -0.0306 0.0474 βit (50,59) n 38 Note: *, ** denote significance at 5% and 1% respectively and n denotes sample size. Results reported are the coefficients derived from the OLS model described in Equation (1):
(1) where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract) using ten minute intervals from t-10 to t60 and it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release. For the ASX SPI200 futures contract the full sample period covered is from October 2003 to October 2013 for the monetary policy announcement; and December 2007 to October 2013, for the explanatory minutes’ release. For the S&P/ASX 200 Index the full sample period covered is from February 2008 to October 2013 for the monetary policy announcement and December 2007 to October 2013 for the explanatory minutes’ release. Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
36
ACCEPTED MANUSCRIPT
βit
β2(dEMR)
βit×dEMR)
R2
-0.1380 (-1.57)
0.2105
-0.1427 (-1.61)
0.1734
0.0002 (-0.42)
-0.1062 (-2.77)**
-0.0002 (-0.42)
S&P/ASX 200 Index
-0.0001 (-0.31)
-0.0645 (-3.54)**
0.0001 (0.17)
SC
ASX SPI200 futures contract
RI P
T
Table 2 The differential impact of unexpected monetary policy announcements and explanatory minutes’ releases on the Australian equity market.
Note: *, ** denote significance at 5% and 1% respectively. T-statistics are in parentheses.
MA NU
Results reported are the coefficients derived from the OLS model described in Equation (2): (2)
where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract) using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement or explanatory minutes’ release and the dummy dEMR is set to one for an explanatory minutes’ release and zero for a monetary policy announcement.
AC
CE
PT
ED
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
37
ACCEPTED MANUSCRIPT Table 3 The impact of unexpected monetary policy announcements and explanatory minutes’ releases on Australian equity market volatility.
Mean equation c R 2(dt(0,9)×it)
0.0000 -0.0561** -0.0916**
0.0000 -0.0568** -0.1779**
Volatility equation βc Magnitude β1(t-1t-1) Asymmetry β2t-1t-1) Persistence β(logt-1)) β(dt(-10,-1)) β(dt(0,9)) β(dt(10,19)) β(dt(20,29)) β(dt(30,39)) β(dt(40,49)) β(dt(50,59))
-3.5907** 0.4304** 0.0011 0.7903** 0.4982* 1.5850** 0.4940* 0.6684** 0.7825** 0.4193 0.4666
AIC SIC Log Likelihood
12.55 12.55 1995340
T
Monetary Policy Announcement
0.0000 -0.0230** -0.0999*
-3.0054** 0.4190** -0.0004 0.8240** -0.3320 2.2260** 0.3576 0.5994 0.6731 0.6798 0.2665
-0.3727** 7.5127** -0.0895 0.9589** 0.5519 1.2146** -0.2050 0.0288 -0.3346 -0.0949 -1.2950**
-0.3789** 7.5343** -0.0832 0.9581** 0.2931 0.5663 -0.2982 -0.3550 0.3342 0.2315 -0.3045
12.25 12.25 1129048
11.17 11.17 385920.3
11.17 11.16 385852.4
SC
0.0000 -0.0227** -0.0574**
MA NU
ED
Explanatory Minutes’ Release
CE
PT
S&P/ASX 200 Index
RI P
ASX SPI200 futures contract Explanatory Monetary Policy Minutes’ Announcement Release
Note: *, ** denote significance at 5% and 1% respectively.
AC
Results reported are the coefficients derived from the quasi-maximum likelihood estimates of the EGARCH model described in Equations (3) and (4): (3) (4) where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract) using ten minute intervals from t-10 to t, Rt-1 represents the ten-minute lagged implied return (return), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release and dt is a vector of dummy variables that take the value of one in each ten minute interval t (from t-10 to t+60), or zero otherwise. After confirmation of the presence of an ARCH effect in the returns of the ASX SPI200 futures contract and the implied returns of the S&P/ASX 200 Index, the appropriate model was selected after comparing the Akaike information criterion (AIC), Schwarz information criterion (SIC) and log likelihood function which supports the use an EGARCH model with a Student t distribution. Additionally these distributions have no remaining ARCH effects, as confirmed by the ARCH LM test, or serial correlation, as confirmed by both the correlogram of standard residuals and the correlogram of standard residuals squared.
38
ACCEPTED MANUSCRIPT
PT
Table 4 Evidence of the exchange rate channel of monetary policy.
Monetary policy announcement α βΔit dMN βΔit×dMN
R
Indicators of a multinational firm
0.1272 0.1245
MA
-0.0314 (-3.42)** -0.0193 (-2.08)*
0.0000 (-0.03) 0.0000 (-0.29) 0.0000 (-0.33)
-0.0443 (-2.16)* -0.1281 (-3.34)** -0.0041 (-0.17)
2
0.0012 0.0000 (-0.09) -0.0001 (-0.61)
-0.0455 (-0.81) -0.1445 (-3.22)**
0.0097 0.0039
TE
D
0.0004 (3.52)** 0.0001 (-0.94)
NU S
0.1233
R
CE P
Foreign Revenue>25% of total revenue
-0.1007 (-21.65)** -0.0850 (-15.33)** -0.0898 (-13.21)**
Explanatory Minutes’ Release α βΔit dMN βΔit×dMN
AC
Foreign Assets>25% of total assets
0.0002 (4.36)** 0.0000 (-0.78) 0.0002 (2.36)*
2
CR I
Panel A – Exchange rate channel
39
CR I
MA
NU S
Explanatory Minutes’ Release Assets Revenue -0.0006 (-2.09)* -0.0001 (-1.08) -0.1310 (-3.42)** -0.0038 (-0.15) 0.0000 (-0.10) -0.0001 (-0.75) -0.0438 (-0.45) -0.1547 (-1.80) 0.0003 (-0.80) -0.0001 (-0.36) 0.0008 (2.19)* 0.0004 (-1.34) 0.0008 (2.19)* 0.0004 (-1.33) 0.0010 (2.18)* 0.0006 (-1.43) 0.0001 (-0.29) -0.0003 (-0.98) 0.0008 (2.21)* 0.0004 (-1.46) 0.0013 (2.19)* 0.0001 (-1.34) 0.0004 (-0.66) 0.0001 (-0.14) 0.0006 (-1.24) 0.0002 (-0.48) -0.0001 (-0.11) -0.0005 (-0.93) 0.0195 (-0.13) 0.0068 (-0.05) -0.0415 (-0.35) -0.0326 (-0.29) 0.1450 (-0.98) 0.1236 (-0.93) 0.0898 (-0.30) 0.3043 (-1.29) 0.0283 (-0.26) -0.0037 (-0.04) 0.0359 (-0.30) -0.0730 (-0.63) -0.0356 (-0.16) 0.1259 (-0.81) -0.3361 (-1.41) -0.5037 (-1.99)* 0.1035 (-0.69) 0.0845 (-0.53) -0.4006 (-1.49) -0.5682 (-2.15)* 0.0156 0.0081
AC
CE P
TE
D
Panel B – Exchange rate channel in S&P/ASX 200 sector indices Monetary policy announcement Assets Revenue α 0.0000 (-0.44) 0.0002 (-1.59) β1Δit -0.0851 (-15.35)** -0.0899 (-13.23)** β2(dMN) 0.0004 (3.61)** 0.0001 (-1.06) β3(Δit×dMN) -0.0279 (-2.06)* -0.0194 (-1.47) β4(denergy) -0.0003 (-1.52) -0.0003 (-1.56) β4(dindustrials) 0.0001 (-0.35) 0.0000 (-0.22) β4(dconsumer discretionary) -0.0001 (-0.50) -0.0001 (-0.84) β4(dconsumer staples) 0.0002 (-0.79) 0.0001 (-0.60) β4(dhealth) -0.0005 (-2.75)** -0.0005 (-2.63)** β4(dfinancials) 0.0002 (-0.89) 0.0001 (-0.56) β4(dAREITs) 0.0003 (-1.22) 0.0003 (-1.20) β4(dinformation technology) -0.0007 (-2.93)** -0.0007 (-2.87)** β4(dtelecommunication) 0.0003 (-1.07) 0.0003 (-1.02) β4(dutilities) -0.0001 (-0.20) -0.0001 (-0.44) β5(Δit×dMN×denergy) 0.0365 (-1.78) 0.0252 (-1.34) β5(Δit×dMN×dindustrials) 0.0138 (-0.67) 0.0060 (-0.32) β5(Δit×dMN×dconsumer discretionary) -0.0151 (-0.61) -0.0044 (-0.18) β5(Δit×dMN×dconsumer staples) 0.0641 (3.76)** 0.0508 (1.97)* β5(Δit×dMN×dhealth) 0.0351 (-1.88) 0.0356 (-1.93)* β5(Δit×dMN×dfinancials) -0.0236 (-0.77) -0.0142 (-0.57) β5(Δit×dMN×dAREITs) -0.0755 (-2.12)* -0.0501 (-1.78) β5(Δit×dMN×dinformation technology) 0.0432 (2.07)* 0.0340 (-1.49) β5(Δit×dMN×dtelecommunication) -0.0115 (-0.31) -0.0131 (-0.35) β5(Δit×dMN×dutilities) -0.1092 (-2.07)* -0.0364 (-0.78) 2 R 0.1369 0.1296
PT
ACCEPTED MANUSCRIPT
40
CR I
D
MA
NU S
Explanatory Minutes’ Release Assets Revenue 0.0003 (-0.91) 0.0004 (-1.15) -0.1317 (-3.46)** -0.0043 (-0.17) 0.0000 (-0.08) -0.0004 (-1.06) -0.1514 (-1.11) -0.0005 (-1.25) -0.0005 (-1.29) -0.0002 (-1.25) -0.0012 (-0.92) -0.1823 (-1.59) 0.1356 (-1.01) 0.0329 (-0.28) 0.9288 (4.30)** 0.3802 (-1.26) 0.0120 0.0050
TE
Panel C - Exchange rate channel based on company size Monetary policy announcement Assets Revenue α 0.0005 (2.10)* 0.0007 (2.57)* β1Δit -0.0851 (-15.36)** -0.0899 (-13.23)** β2(dMN) 0.0004 (3.58)** -0.0005 (-2.01)* β3(Δit×dMN) -0.0969 (-3.35)** -0.0007 (-2.41)* β4(dsize portfolio 2) -0.0005 (-1.97)* 0.0001 (-1.04) β4(dsize portfolio 3) -0.0006 (-2.32)* -0.0843 (-3.05)** β5(Δit×dMN×dsize portfolio 2) 0.0721 (2.44)* 0.0709 (2.57)* β5(Δit×dMN×dsize portfolio 3) 0.0868 (2.77)** 0.0851 (2.92)** 2 R 0.1311 0.1288
PT
ACCEPTED MANUSCRIPT
Note: *, ** denote significance at 5% and 1% respectively. T-statistics are in parentheses.
CE P
Results reported in Panel A are the coefficients derived from the OLS model described in Equation (5): (5)
AC
where Ri,t represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release and the dummy variable dMN is equal to one for multinational firms, determined by the proportion of foreign-held assets and foreign-generated revenue, or zero otherwise. Results reported in Panel B and C are the coefficients derived from the OLS model described in Equations (6) and (7) respectively: (6) (7) where dsector is a vector of dummy variables set equal to one for each S&P/ASX 200 sector or zero otherwise, and dsize is a vector of dummy variables set equal to one for each size portfolio or zero otherwise.
41
ACCEPTED MANUSCRIPT
CR I
PT
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
NU S
Table 5 Evidence of industry cyclicality and the interest rate channel of monetary policy.
AC
CE P
TE
D
MA
Panel A - Impact of unexpected monetary policy announcements and explanatory minutes’ releases on the S&P/ASX 200 sector indices Monetary Policy Explanatory Minutes’ Announcement Release 2 R S&P/ASX 200 sector indicies α α βit βit Energy -0.0001 -0.0393** 0.0844 -0.0002 -0.1636* Materials -0.0003 -0.0543* 0.1409 -0.0002 -0.1847* Industrials 0.0000 -0.0517* 0.1646 0.0001 -0.1544 Consumer Discretionary 0.0001 -0.0874** 0.3461 -0.0001 -0.1490 Consumer Staples 0.0000 -0.0587** 0.2888 0.0000 -0.1131 Health -0.0003 -0.0328* 0.0656 -0.0001 -0.1314* Financials -0.0001 -0.0832** 0.2227 0.0001 -0.2902* Information Technology -0.0002 -0.0801** 0.1317 -0.0002 -0.5086** Telecommunications 0.0004 -0.0543** 0.1066 -0.0003 -0.1496 Utilities 0.0002 -0.0384* 0.1009 -0.0003 -0.1778 A-REITs 0.0001 -0.0642* 0.1098 -0.0001 -0.2403* Financials excluding A-REITs -0.0001 -0.0870** 0.2289 0.0002 -0.3015* Panel B - Impact of Australian gross national income (GNI) on the S&P/ASX 200 sector indices α S&P/ASX 200 sector indicies βiGNIt Energy 0.0317 0.2259 0.0003 Materials 0.0383 -1.5232 0.0114 Industrials 0.0337 -2.4379 0.0299 Consumer Discretionary 0.0519* -4.7784* 0.1332 Consumer Staples 0.0426** -1.9816 0.0592 Health 0.0528** -1.4574 0.0311 Financials 0.0525* -3.8836 0.1023 Information Technology 0.0652* -3.2078 0.0612 Telecommunications 0.0158 -0.8819 0.0080
2
R 0.0517 0.0897 0.0563 0.0760 0.0392 0.0457 0.0912 0.2245 0.0377 0.0674 0.0938 0.0835
42
ACCEPTED MANUSCRIPT
-0.4179 -1.3977* -4.3350*
0.0026 0.0109 0.1241
PT
0.0155 0.0121 0.0607
Panel C - Industry cyclicality
MA
NU S
Monetary Policy Announcement Spearman's rank correlation (r) 0.78 Wilcoxon signed rank test (z score) -0.94 Note: *, ** denote significance at 5% and 1% respectively.
CR I
Utilities A-REITs Financials excluding A-REITs
Explanatory Minutes’ Release 0.22 -0.24
Results reported in Panel A are the coefficients derived from the OLS model described in Equation (8):
D
(8)
TE
where Ri,t represents the implied return of the S&P/ASX 200 sector index (i) using ten minute intervals (t0,9 -t10,-1) and it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release.
CE P
The results reported in Panel B are the coefficients derived from the OLS model described in Equation (9): (9)
AC
where Ri,t represents the implied return of the S&P/ASX 200 sector index (i) and GNIt represents the latest percentage change in Australian gross national income (GNI). The sample period covered is from October 2003 to October 2013. Panel C reports the results of a Spearman rank correlation test and Wilcoxon signed rank test. Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
43
ACCEPTED MANUSCRIPT
R2 0.0315 0.0305 0.0335 0.0406 0.0381 0.0316 0.0309 0.0354
Panel B – Impact of explanatory minutes’ releases on financially constrained portfolios formed using the constituents of the S&P/ASX 200 Index α β1Δit β2(dFC) β3(Δit×dFC) -0.0001 -0.1611** Book to Market -0.0001* -0.1623** 0.0002 -0.0392 Debt to Equity -0.0001 -0.1807** 0.0002 -0.0259 Dividend Yield -0.0001 -0.1718** 0.0002 0.0143 Interest Coverage 0.0000 -0.1527** 0.0001 -0.1072 Liability/Assets -0.0001* -0.1506** 0.0002 -0.0631 Size -0.0001 -0.1845** 0.0001 0.0650 Short-term debt/Total debt 0.0000 -0.1982** 0.0001 0.0448
R 0.0073 0.0089 0.0101 0.0106 0.0111 0.0082 0.0084 0.0103
MA NU
SC
RI P
T
Table 6 Evidence of the balance sheet channel of monetary policy. Panel A – Impact of monetary policy announcements on financially constrained portfolios formed using the constituents of the S&P/ASX 200 Index α β1Δit β2(dFC) β3(Δit×dFC) -0.0000 -0.0539** Book to Market -0.0001 -0.0500** 0.0002 -0.0103 Debt to Equity 0.0000 -0.0584** 0.0000 0.0103 Dividend Yield 0.0000 -0.0554** 0.0002 -0.0090 Interest Coverage 0.0000 -0.0556** 0.0001 -0.0090 Liability/Assets 0.0000 -0.0548** -0.0001 0.0037 Size -0.0001 -0.0569** 0.0001 0.0168* Short-term debt/Total debt 0.0000 -0.0552** 0.0001 -0.0055
ED
2
AC
CE
PT
Panel C – Impact of monetary policy announcements on financially constrained constituents of the S&P/ASX 200 Index 2 α β1Δit β2FCv,i β3Δit×FCv,i R -0.0000 -0.0539** 0.0315 Book to Market -0.0002 -0.0285** 0.0003 -0.0325** 0.0380 Debt to Equity -0.0000 -0.0561** 0.0000** 0.0000 0.0335 Dividend Yield -0.0006** -0.0176* 0.0001** -0.0077** 0.0591 Interest Coverage 0.0000 -0.0584** 0.0000 0.0000* 0.0385 Liability/Assets -0.0001 -0.0361** 0.0001 -0.0382** 0.0324 Size -0.0000 -0.0522** 0.0000* 0.0000 0.0303 Short-term debt/Total debt -0.0000 -0.0567** 0.0000 0.0000 0.0353 Panel D – Impact of explanatory minutes’ releases on financially constrained constituents of the S&P/ASX 200 Index 2 α β1Δit β2FCv,i β3Δit×FCv,i R -0.0001 -0.1611** 0.0073 Book to Market -0.0003** -0.1992** 0.0003* 0.0238 0.0140 Debt to Equity -0.0000 -0.1526** 0.0000 -0.0004 0.0108 Dividend Yield -0.0003* -0.1924** 0.0001* 0.0016 0.0163 Interest Coverage -0.0000 -0.1833** 0.0000 0.0000** 0.0115 Liability/Assets -0.0002* -0.0826 0.0004 -0.1662 0.0085 Size -0.0001 -0.1647** 0.0000 0.0000 0.0081 Short-term debt/Total debt -0.0000 -0.1882** 0.0000* 0.0001 0.0104 Note: *, ** denote significance at 5% and 1% respectively.
44
ACCEPTED MANUSCRIPT Results reported in Panels A and B are the coefficients derived from the OLS model described in Equation (10): (10)
RI P
T
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release and the dummy variable dFC is set equal to one for firms that have been identified as financially constrained, based on their book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size or short-term to total debt, and zero otherwise.
SC
Results reported in Panels C and D are the coefficients derived from the OLS model described in Equation (11): (11)
MA NU
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release and the variable FCv,i is a vector of continuous variables used to proxy for financial constraint based on company i’s book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size or short-term to total debt.
AC
CE
PT
ED
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
45
ACCEPTED MANUSCRIPT
AC
CE
PT
ED
MA NU
SC
RI P
T
Table 7 Evidence of the bank loan and balance sheet channel of monetary policy - The impact of unexpected monetary policy announcements during economic cycles and on financially constrained portfolios formed using the constituents of the S&P/ASX 200 Index. Panel A - Impact of monetary policy announcements on financially constrained portfolios during the GFC 2 β3(Δit β4(dFC β5(Δit×d β6(Δit×dFC× R α β1Δit β2(dEC) ×dEC) ) dEC) FC) GFC period endogeneously determined 0.031 0.0539* 5 0.0000 * 0.070 0.0399* 0.0019 0.2400* 3 -0.0001 * ** * 0.068 Book to Market 0.0372* 0.0019 0.2284* 0.000 2 -0.0002 * ** * 2 -0.0074 -0.0366 0.070 Debt to Equity) 0.0446* 0.0018 0.2316* 0.000 2 -0.0001 * ** * 0 0.0101 0.0035 0.081 Dividend Yield 0.0423* 0.0018 0.2191* 0.000 0 -0.0002 * ** * 2 -0.0081 -0.0100 0.081 Interest Coverage 0.0423* 0.0019 0.2252* 0.000 7 -0.0002 * ** * 2 -0.0038 -0.0648 0.070 Liability/Assets 0.0415* 0.0019 0.2326* 0.000 4 -0.0001 * ** * 1 0.0062 -0.0320 0.068 Size 0.0436* 0.0019 0.2326* 0.000 8 -0.0002 * ** * 1 0.0183* -0.0200 0.074 Short-term debt/Total 0.0407* 0.0018 0.2385* 0.000 0 debt -0.0001 * ** * 1 -0.0068 0.0165 GFC period exogeneously determined 0.0539* 0.0000 * 0.0399* 0.0001* * Book to Market 0.0001* 0.0371* * * Debt to Equity 0.0445* -0.0001 * Dividend Yield 0.0422* 0.0001* * Interest Coverage 0.0424* 0.0001* * Liability/Assets -0.0001 -
0.031 5
0.0035 ** 0.0035 ** 0.0036 ** 0.0035 ** 0.0035 ** 0.0035
0.3215* * 0.3103* * 0.3168* * 0.3034* * 0.3074* * -
0.082 0
0.000 2 0.000 0 0.000 2 0.000 2 -
0.080 1 -0.0073
-0.0372 0.083 3
0.0099
0.0054 0.096 3
-0.0082
-0.0092 0.095 3
-0.0034 0.0061
-0.0688 -0.0297
0.081
46
ACCEPTED MANUSCRIPT
-0.0001
0.0035 ** 0.0034 **
0.3132* * 0.3134* * 0.3164* *
0.000 1 0.000 1 0.000 1
6 0.080 5 0.0186*
-0.0067
-0.0233 0.085 4 0.0153
MA NU
SC
RI P
Short-term debt/Total debt
**
T
0.0001* *
Size
0.0414* * 0.0436* * 0.0407* *
AC
CE
PT
ED
Panel B - Impact of monetary policy announcements on financially constrained portfolios during a contractionary business cycle phase as determined by the OECD Australian leading index β3(Δit β5(Δit×d β6(Δit×dFC× α β1Δit β2(dEC) β4(dFC) ×dEC) dEC) FC) 0.0539* 0.0000 * 0.0003* 0.0328* 0.0006* 0.0775* * * * * Book to Market 0.0003* 0.0306* 0.0006* 0.0721* * * * * 0.0002 -0.0033 -0.0236 Debt to Equity 0.0002* 0.0359* 0.0006* 0.0825* * * * * 0.0000 0.0037 0.0225 Dividend Yield 0.0002* 0.0339* 0.0006* 0.0759* * * * * 0.0002 -0.0043 -0.0153 Interest Coverage 0.0003* 0.0349* 0.0006* 0.0755* * * * * 0.0001 -0.0035 -0.0183 Liability/Assets 0.0002* 0.0338* 0.0006* 0.0770* * * * * -0.0001 0.0043 -0.0019 Size 0.0003* 0.0355* 0.0006* 0.0788* * * * * 0.0001 0.0164* 0.0013 Short-term 0.0002* 0.0345* 0.0006* 0.0760* debt/Total debt * * * * 0.0001 -0.0016 -0.0129 Panel C - Impact of monetary policy announcements on financially constrained portfolios during a contractionary monetary policy regime β3(Δit β5(Δit×d β6(Δit×dFC× α β1Δit β2(dEC) β4(dFC) ×dEC) dEC) FC) 0.0539* 0.0000 * 0.0004* 0.0001 -
R
2
0.03 15 0.04 64 0.04 57 0.04 83 0.05 81 0.05 51 0.04 64 0.04 61 0.05 10
R
2
0.03 15 0.04
47
ACCEPTED MANUSCRIPT *
34 0.04 23
MA NU
0.0103 0.04 40
T
-0.0148
0.0054
RI P
0.0001
-0.0149
0.0133
0.0001
-0.0031
0.0000
0.0001
SC
0.0153* 0.0905* * * Book to Market 0.0004* 0.0104* 0.0922* * * 0.0001 * Debt to Equity 0.0005* 0.0210* 0.0860* * * 0.0000 * Dividend Yield 0.0005* 0.0174* 0.0869* * * 0.0000 * Interest Coverage 0.0004* 0.0201* 0.0869* * * 0.0001 * Liability/Assets 0.0005* 0.0161* 0.0907* * * 0.0001 * Size 0.0004* 0.0174* 0.0925* * * 0.0001 * Short-term 0.0004* 0.0179* 0.0860* debt/Total debt * * 0.0000 * Note: *, ** denote significance at 5% and 1% respectively.
-0.0001
0.0080
-0.0077
0.05 22 0.04 97 0.04 34
0.0021
0.0035 0.04 29
0.0001
0.0132
0.0081 0.04 68
0.0001
-0.0036
-0.0044
ED
Results reported in Panels A, B, and C are the coefficients derived from the OLS model described in Equation (12):
PT
(12)
AC
CE
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement, the dummy variable dFC is set equal to one for firms that have been identified as financially constrained based on their book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size, or short-term to total debt, and zero otherwise and the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and is set to zero otherwise. Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot. Table 8 Evidence of the bank loan and balance sheet channel of monetary policy - The impact of unexpected monetary policy announcements during economic cycles and on financially constrained constituents of the S&P/ASX 200 Index. Panel A - Impact of monetary policy announcements on financially constrained constituents during the GFC 2 β3(Δit β5(Δit×F β6(Δit×FC R α β1Δit β2(dEC) ×dEC) β4(FCv,i) Cv,i) v,i× dEC) GFC period endogeneously determined 0.0315 0.0539* -0.0000 * 0.0019* 0.0703 0.0001* 0.0399* * 0.2400*
48
ACCEPTED MANUSCRIPT
Interest Coverage
Liability/Assets
Size Short-term debt/Total debt
-0.0001 0.0001* * 0.0001* *
0.0019* * 0.0019* * 0.0019* * 0.0018* *
PT
CE
AC
0.0035* * 0.0034* * 0.0035* * 0.0032* * 0.0035* * 0.0035* * 0.0035* * 0.0034* *
0.0004*
0.3215* * 0.2886* * 0.3197* * 0.2819* * 0.3267* * 0.2827* * 0.3159* * 0.3147* *
-0.0093
-0.0241 0.0703
0.0000 0.0001* *
0.0000 0.0040* *
T
0.0016* *
ED
GFC period exogeneously determined 0.0539* -0.0000 * 0.0399* -0.0001* * 0.0004* 0.0326* Book to Market * * 0.0438* Debt to Equity -0.0001 * 0.0006* 0.0258* Dividend Yield * * 0.0437* Interest Coverage -0.0001 * 0.0342* Liability/Assets -0.0001 * 0.0382* Size -0.0001 * Short-term 0.0424* debt/Total debt -0.0001 *
0.0018* *
0.0729
RI P
Dividend Yield
-0.0001* 0.0007* * 0.0001* *
0.0018* *
* 0.2058* * 0.2371* * 0.1981* * 0.2433* * 0.2054* * 0.2346* * 0.2368* *
0.0000
SC
Debt to Equity
* 0.0328* * 0.0436* * 0.0254* * 0.0438* * 0.0342* * 0.0382* * 0.0424* *
MA NU
Book to Market
* 0.0005* *
0.0000
0.0000* *
0.0000*
0.0001 0.0917 -0.0015 0.0814 0.0001 0.0705
-0.0126
-0.0623 0.0684
0.0000
0.0000 0.0741
0.0000
0.0000
0.0002
0.0315
0.0820
0.0838 0.0004*
-0.0094
-0.0207 0.0834
0.0000* 0.0001* *
0.0000 0.0038* *
0.0000 0.1049 -0.0010 0.0950
0.0000
0.0000*
0.0001 0.0818
0.0000
-0.0125
-0.0672 0.0801
0.0000*
0.0000
-0.0000 0.0855
0.0000
0.0000
0.0002
Panel B - Impact of monetary policy announcements on financially constrained constituents during a contractionary business cycle phase as determined by the OECD Australian leading index
49
ACCEPTED MANUSCRIPT β3(Δit ×dEC)
β6(Δit×FCv,i× dEC)
β1Δit β2(dEC) β4(FCv,i) 0.0539* -0.0000 * 0.0003* 0.0328* 0.0006* 0.0775* * * * * 0.0006* 0.0318* 0.0006* 0.0410* Book to Market * * * * 0.0004* 0.0004 -0.0440** 0.0002* 0.0356* 0.0006* 0.0756* Debt to Equity * * * * 0.0000 0.0000 -0.0000 0.0008* 0.0228* 0.0005* 0.0431* 0.0001* Dividend Yield * * * * * -0.0025 -0.0059* 0.0002* 0.0368* 0.0006* 0.0795* 0.0000* Interest Coverage * * * * 0.0000 * 0.0000 0.0003* 0.0254* 0.0006* 0.0507* Liability/Assets * * * * 0.0002 -0.0159 -0.0547 0.0002* 0.0307* 0.0006* 0.0784* Size * * * * 0.0000* 0.0000 0.0000 Short-term 0.0002* 0.0349* 0.0006* 0.0794* debt/Total debt * * * * 0.0000 0.0000 0.0000 Panel C - Impact of monetary policy announcements on financially constrained constituents during a contractionary monetary policy regime 0.0539* 0.0000 * 0.0004* 0.0153* 0.0905* * * 0.0001 * 0.0537* Book to Market 0.0001 -0.0140 0.0000 * 0.0005* -0.0002 -0.0447* 0.0004* 0.0203* 0.0808* Debt to Equity * * 0.0000 * 0.0000* 0.0000 -0.0001 0.0001* Dividend Yield -0.0003 -0.0130 0.0000 0.0402* * -0.0022 -0.0066 0.0004* 0.0226* 0.0875* Interest Coverage * * 0.0001 * 0.0000 0.0000 0.0000 0.0618* Liability/Assets 0.0003 -0.0120 0.0001 * 0.0004 -0.0084 -0.0582 0.0005* 0.0907* Size * 0.0133* 0.0001 * 0.0000* 0.0000 0.0000 Short-term 0.0005* 0.0184* 0.0883* debt/Total debt * * 0.0000 * 0.0000* 0.0000 0.0001**
AC
CE
PT
ED
MA NU
SC
RI P
T
α
β5(Δit×F Cv,i)
R
2
0.03 15 0.04 64 0.05 46 0.04 80 0.07 54 0.05 57 0.04 74 0.04 55 0.05 09
0.03 15 0.04 34 0.05 05 0.04 40 0.06 93 0.05 00 0.04 43 0.04 23 0.04 69
50
ACCEPTED MANUSCRIPT Note: *, ** denote significance at 5% and 1% respectively. Results reported in Panels A, B and C are the coefficients derived from the OLS model described in Equation (13): (13)
SC
RI P
T
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement, the variable FCv,i is a vector of continuous variables used to proxy for financial constraint based on company i’s book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size, or short-term to total debt and the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and is set to zero otherwise.
AC
CE
PT
ED
MA NU
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
51
ACCEPTED MANUSCRIPT
AC
CE
PT
ED
MA NU
SC
RI P
T
Table 9 Evidence of the bank loan and balance sheet channel of monetary policy - The impact of unexpected explanatory minutes’ releases during economic cycles and on financially constrained portfolios formed using the constituents of the S&P/ASX 200 Index. Panel A - Impact of explanatory minutes’ releases on financially constrained portfolios during the GFC 2 β3(Δit β5(Δit×d β6(ΔitxdFC R α β1Δit β2(dEC) β4(dFC) ×dEC) x dEC) FC) GFC period endogeneously determined 0.0073 0.1611 0.0001 ** 0.0101 0.0989 0.0005 0.1880 0.0001 ** ** ** 0.0117 Book to Market 0.0945 0.0005 0.2037 0.000 0.0002 ** ** ** 2 -0.0676 0.0697 0.0130 Debt to Equity 0.1272 0.0005 0.1685 0.000 0.0001 ** ** ** 2 -0.0013 -0.0589 0.0117 Dividend Yield 0.1480 0.0003 0.000 0.0001 ** ** -0.0781 2 0.0289 -0.0342 0.0149 Interest Coverage 0.1246 0.0004 0.000 0.0001 ** ** -0.0997 1 0.0113 -0.2753 0.0115 Liability/Assets 0.1010 0.0005 0.1591 0.000 0.0002 ** ** * 2 0.0045 -0.1673 0.0114 Size 0.1132 0.0005 0.2121 0.000 0.0001 ** ** ** 1 0.0364 0.0697 0.0139 Short-term debt/Total 0.1155 0.0005 0.2393 0.000 debt 0.0001 ** ** ** 1 -0.0129 0.1384 GFC period exogeneously determined 0.1611 0.0001 ** 0.0001 0.1220 ** ** Book to Market 0.0002 0.1210 ** ** Debt to Equity 0.0001 0.1450 * ** Dividend Yield 0.0001 0.1725 * ** Interest Coverage 0.0001 0.1506 * ** Liability/Assets -
0.0073
0.0008 ** 0.0008 ** 0.0010 **
0.1838 ** 0.1865 ** 0.1928 **
0.0099
0.0113 0.000 2
-0.0511
0.0304 0.0136
0.000 2
-0.0153
-0.0261 0.0121
0.0006 **
-0.0640
0.000 2
-0.0940 -
0.000 2 0.000
0.0253
-0.0272 0.0156
0.0009 ** 0.0008
0.0218 -0.0260
-0.3158 -0.0966
0.0110
52
ACCEPTED MANUSCRIPT
Size
0.0001
**
0.0008 ** 0.0009 **
0.1740 * 0.1849 ** 0.2300 **
2 0.0108 0.000 1
0.0668
-0.0052 0.0137
0.000 1
0.0014
0.1094
RI P
Short-term debt/Total debt
0.1163 ** 0.1436 ** 0.1436 **
T
0.0002 ** 0.0001 **
AC
CE
PT
ED
MA NU
SC
Panel B - Impact of explanatory minutes’ releases on financially constrained portfolios during a contractionary business cycle phase as determined by the OECD Australian leading index β3(Δit β5(Δit×d β6(ΔitxdFC α β1Δit β2(dEC) β4(dFC) ×dEC) x dEC) FC) 0.1611 0.0001 ** 0.2342 0.0000 0.0273 0.0001 ** Book to Market 0.2391 0.000 0.0001 0.0268 0.0001 ** 2 -0.0557 0.0278 Debt to Equity 0.0759 0.1844 0.000 0.0001 ** 0.0001 ** 2 0.0577 -0.1418 Dividend Yield 0.1055 0.1167 0.000 0.0001 ** 0.0001 ** 2 0.0795 -0.1081 Interest Coverage 0.0766 0.1312 0.000 0.0000 ** 0.0001 ** 2 0.0627 -0.2806 Liability/Assets 0.1895 0.000 0.0001 0.0438 0.0001 ** 2* 0.0650 -0.2197 Size 0.2409 0.000 0.0001 0.0482 0.0001 ** 1 0.0708 -0.0103 Short-term debt/Total 0.2796 0.000 debt 0.0000 0.0380 0.0001 ** 1 -0.0279 0.1223 Panel C - Impact of explanatory minutes’ releases on financially constrained portfolios during a contractionary monetary policy regime 0.1611 0.0001 ** 0.0001 0.0755 0.0001 -0.1236 Book to Market 0.1796 0.000 0.0001 0.0535 0.0000 ** 0 -0.1703 0.2185 Debt to Equity 0.1132 0.000 0.0000 ** 0.0000 -0.1154 2 -0.0004 -0.0424
R
2
0.0073
0.0109
0.0125
0.0136
0.0126
0.0152
0.0126
0.0123
0.0146
0.0073
0.0080 0.0098
0.0107
53
ACCEPTED MANUSCRIPT
Interest Coverage 0.0000 Liability/Assets 0.0000
0.0109 0.0002
-0.0328
0.000 1
-0.0322
0.000 4*
-0.0978 0.1832 **
0.000 3* 0.000 1
-0.0550
0.1125 0.0127
0.0001
0.0000
0.0001 0.0706 0.0000 Short-term debt/Total 0.1040 debt 0.0001 * 0.0000 -0.1598 Note: *, ** denote significance at 5% and 1% respectively.
SC
Size
0.1043
0.0375
-0.0504
0.0303
0.0091
-0.1676 0.0093 0.1920 0.0112 0.0238
MA NU
0.000 1
-0.3436
T
0.0000
0.1304 ** 0.1264 ** 0.0860 *
RI P
Dividend Yield
Results reported in Panels A, B, and C are the coefficients derived from the OLS model described in Equation (12): (12)
PT
ED
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the explanatory minutes’ release, the dummy variable dFC is equal to one for firms that have been identified as financially constrained based on their book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size, or short-term to total debt, and zero otherwise and the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and is set to zero otherwise.
AC
CE
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
54
ACCEPTED MANUSCRIPT
CE
PT
ED
MA NU
SC
RI P
T
Table 10 Evidence of the bank loan and balance sheet channels of monetary policy - The impact of unexpected explanatory minutes’ releases on financially constrained constituents of the S&P/ASX 200 Index. Panel A - Impact of explanatory minutes’ releases on financially constrained constituents during the GFC 2 β3(Δit β5(Δit×F β6(Δit×FCv,i R α β1Δit β2(dEC) ×dEC) β4(FCv,i) Cv,i) × dEC) GFC period endogeneously determined 0.00 0.1611* 73 -0.0001 * 0.00 0.1241* 84 0.0001* * 0.0003 0.1289* 0.01 0.3082* 80 Book to Market -0.0002 -0.0750 0.0003 * 0.0002 -0.0735 0.1630 0.01 0.1471* 23 Debt to Equity -0.0001 * 0.0003 -0.0509 0.0000 -0.0001 -0.0007 0.02 0.2965* 11 Dividend Yield -0.0002 -0.0161 0.0001 * 0.0000 -0.0256 0.0345* 0.01 0.1524* 0.0000* 31 Interest Coverage -0.0000 * 0.0003 -0.1245 0.0000 * 0.0006* 0.00 0.0003* 98 Liability/Assets * -0.0916 0.0003 -0.0313 0.0005* -0.0657 -0.2007 0.00 0.1251* 94 Size -0.0001 * 0.0003* 0.1393* 0.0000 0.0000 0.0000 0.01 Short-term 0.1432* 31 debt/Total debt -0.0000 * 0.0004* 0.1619* 0.0000 -0.0000 0.0008**
AC
GFC period exogeneously determined 0.1611* -0.0001 * 0.0001* 0.1220* * * 0.0003* Book to Market * 0.0859* 0.1338* Debt to Equity -0.0001 * Dividend Yield
-0.0003
Interest Coverage
-0.0001 0.0003* *
Liability/Assets
-0.0603 0.1502* *
-0.0784
0.00 73
0.0008* * 0.0006* * 0.0010* * 0.0005* 0.0009* * 0.0008* *
0.1838* * 0.2828* * 0.1504* 0.2571* 0.1819* *
0.00 99 0.01 69 0.0003*
-0.0671
0.1147 0.01 43
0.0000
-0.0002
-0.0004
0.0000
-0.0196
0.0257
0.0000
0.0000* *
0.0003
0.01 93 0.01 48 0.01 11
-0.1286
0.0004
-0.0907
-0.1162
55
ACCEPTED MANUSCRIPT 0.0001*
Size
-0.0001
0.0008* * 0.0009* *
0.1911* * 0.2117* *
0.01 06 0.0000
-0.0000
0.0000 0.01 44
0.0000
0.0000
0.0007*
AC
CE
PT
ED
MA NU
SC
RI P
T
Short-term debt/Total debt
0.1209* * 0.1428* *
56
ACCEPTED MANUSCRIPT
AC
CE
PT
ED
MA NU
SC
RI P
T
Panel B - Impact of explanatory minutes’ releases on financially constrained constituents during a contractionary business cycle phase as determined by the OECD Australian leading index β3(Δit β5(Δit×F β6(Δit×FCv,i α β1Δit β2(dEC) ×dEC) β4(FCv,i) Cv,i) × dEC) 0.1611* -0.0001 * 0.2342* 0.0000 -0.0273 0.0001 * 0.3055* Book to Market 0.0003* -0.0160 0.0001 * 0.0003* -0.0356 0.0752 0.0706* 0.1365* Debt to Equity 0.0000 * 0.0001 * 0.0000* 0.0001 -0.0009* Dividend Yield -0.0003 0.0826* 0.0000 0.1954* 0.0000 -0.0002 0.0037 0.1967* 0.0000* Interest Coverage 0.0000 0.0672* 0.0001 * 0.0000 * 0.0000 0.0003* 0.0006* Liability/Assets * -0.0943 0.0001 -0.0068 * 0.1429 -0.4681 0.2450* Size 0.0000 -0.0249 0.0001 * 0.0000 0.0000 0.0000 Short-term 0.2498* debt/Total debt 0.0000 -0.0460 0.0001 * 0.0000* 0.0001 0.0000 Panel C - Impact of explanatory minutes’ releases on financially constrained constituents during a contractionary monetary policy regime 0.1611* -0.0001 * 0.0001
-0.0755
-0.0001
Book to Market
-0.0000
0.0001
Debt to Equity
0.0001
-0.0344 0.0854*
Dividend Yield
0.0000
Interest Coverage
0.0001
0.0652 0.1082*
Liability/Assets
-0.0003
-0.1124
-0.1236 0.2881*
0.0001
-0.0744
0.1525
0.0000
-0.0001
-0.1114
0.0000
-0.0003 0.0361* 0.0000* *
-0.0002
0.0000
-0.1076 0.3438*
-0.0001
0.0722
0.0008*
0.0764
-0.4113
0.0000
0.0000
0.0000
0.0000
0.0002
-0.0001
0.0000
Size 0.0001 -0.0784 0.0000 -0.1395 Short-term debt/Total debt 0.0001 0.0979* 0.0000 0.1540* Note: *, ** denote significance at 5% and 1% respectively.
0.0000
0.0465* 0.0000
R
2
0.00 73 0.01 09 0.01 83 0.01 48 0.01 87 0.01 44 0.01 30 0.01 21 0.01 46
0.00 73 0.00 80 0.01 61 0.01 14 0.02 10 0.01 21 0.00 97 0.00 88 0.01 13
Results reported in Panels A, B and C are the coefficients derived from the OLS model described in Equation (13):
57
ACCEPTED MANUSCRIPT (13)
RI P
T
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the explanatory minutes’ release, the variable FCv,i is a vector of continuous variables used to proxy for financial constraint based on company i’s book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size, or short-term to total debt and the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and is set to zero otherwise.
AC
CE
PT
ED
MA NU
SC
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
58
ACCEPTED MANUSCRIPT
The Channels of Monetary Policy Triggered by Central Bank Actions
T
and Statements in the Australian Equity Market
RI P
Highlights
RBA actions and statements have a comparable impact on the Australian equity
SC
market
Evidence of all channels of monetary policy following actions and statements
Exposes a comparable avenue to affect monetary policy
Provides an explication of the impact of monetary policy in the equity market
AC
CE
PT
ED
MA NU
59
S1057-5219(16)30059-X doi: 10.1016/j.irfa.2016.04.008 FINANA 982
To appear in:
International Review of Financial Analysis
Received date: Revised date: Accepted date:
23 March 2015 24 March 2016 10 April 2016
Please cite this article as: McCredie, B., Docherty, P., Easton, S. & Uylangco, K., The channels of monetary policy triggered by central bank actions and statements in the Australian equity market, International Review of Financial Analysis (2016), doi: 10.1016/j.irfa.2016.04.008
This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
ACCEPTED MANUSCRIPT The Channels of Monetary Policy Triggered by Central Bank
Bronwyn McCrediea*
SC
Paul Dochertyb
RI P
T
Actions and Statements in the Australian Equity Market
MA NU
Steve Eastonb
ED
Katherine Uylangcoa
PT
a
QUT Business School, Queensland University of Technology, QLD 4000, Australia b
AC
CE
Newcastle Business School, University of Newcastle, NSW 2308, Australia
*Corresponding Author Bronwyn McCredie, QUT Business School, Queensland University of Technology, QLD 4000, Australia Tel +61 7 3138 5029 Email [email protected] [email protected] [email protected] [email protected] 1
AC
CE
PT
ED
MA NU
SC
RI P
T
ACCEPTED MANUSCRIPT
2
ACCEPTED MANUSCRIPT The Channels of Monetary Policy Triggered by Central Bank
AC
CE
PT
ED
MA NU
SC
RI P
T
Actions and Statements in the Australian Equity Market
3
ACCEPTED MANUSCRIPT The Channels of Monetary Policy Triggered by Central Bank Actions
T
and Statements in the Australian Equity Market
RI P
Abstract
Owing to the discrete disclosure practices of the Reserve Bank of Australia, this paper provides new evidence on the channels of monetary policy triggered by central bank actions
SC
(monetary policy announcements) and statements (explanatory minutes releases), in the Australian equity market. Both monetary policy announcements and explanatory minutes releases are shown
MA NU
to have a significant and comparable impact on the returns and volatility of the Australian equity market. Further, distinct from US and European studies that find strong evidence of the interest rate, bank loan and balance sheet channels and no evidence of the exchange rate channel following central bank actions, this paper finds that monetary policy impacts the Australian equity market via the exchange rate, interest rate and bank loan channels of monetary policy, with only weak evidence
ED
of the balance sheet channel of monetary policy. These channels are found to be operating irrespective of the trigger (monetary policy announcements or explanatory minutes releases), though results are somewhat weaker when examining the explanatory minutes releases. These
PT
results have important implications for central bank officials and financial market participants alike: by confirming a comparable avenue to affect monetary policy; and providing an explication of its
Channels of monetary policy; central bank intervention; monetary policy
AC
Keywords:
CE
impact on the Australian equity market.
announcement; explanatory minutes release; equity market
JEL codes:
E52, E58, E32, G14
4
ACCEPTED MANUSCRIPT 1
Introduction Distinct from US and European jurisdictions, Australian monetary policy is communicated by
T
two separate events: the announcement of the monthly target interbank cash rate for overnight
RI P
loans and two weeks later the release of the explanatory minutes of the central bank board meeting that explicate the rate outcome. This paper uses methodology adopted by McCredie et al. (2014) in
SC
the interest rate futures market, to exploit the segregation of these two events1, providing a unique examination of the channels of monetary policy, triggered by central bank actions (monetary policy
MA NU
announcements) and statements (explanatory minutes releases), in the Australian equity market. Namely, this study provides an examination of all three channels of monetary policy in the Australian equity market: the exchange rate channel, the interest rate channel and credit channels (bank loan and balance sheet) 2.
ED
Extant studies have examined the channels of monetary policy transmission following
PT
monetary policy announcements; with several studies reporting evidence of the interest rate channel based on a heterogeneous response across industries, including Dedola and Lippi (2000) and
CE
Bernanke and Kuttner (2003). Further, Peersman and Smets (2005) report no evidence of the exchange rate channel in the Euro area, as measured by the industry’s degree of openness.3
AC
Ehrmann and Fratzscher (2004), Bernanke and Kuttner (2005) and Maio (2014) report evidence of the balance sheet channel in the US. Similarly, Bernanke and Blinder (1992) provide evidence of the bank loan channel as demonstrated by the impact that monetary policy announcements have on the availability of loans. Finally, Basistha and Kurov (2008) provide evidence in the US market of the 1
The distinction between these practices allows this paper to treat each of these events separately, thereby allowing the calculation of the information content of each event to be measured independently so that the impact of the two events can be statistically compared. 2
Monetary policy is asserted to operate through the exchange rate, interest rate and credit channels of monetary policy when changes to or revised expectations of the target interbank cash rate influence the relative price of domestic and foreign currencies, market interest rates and a firm’s external finance premium, respectively (RBA, 2014).
3
Peersman and Smets (2005) measure an industries degree of openness as the ratio of exports and imports over value added. This proposition, however, was not tested at the firm level.
5
ACCEPTED MANUSCRIPT interest rate channel and both credit channels of monetary policy: the balance sheet and bank loan channels.
T
However to date, no study has examined the channels of monetary policy triggered by
RI P
central bank statements. Intuitively, these channels of monetary policy should be consistent with those triggered by central bank actions. However, some studies claim that monetary policy
SC
actions and statements have a differential effect on asset prices (Guraynak et al., 2005; Rosa, 2011), especially during crisis periods when actions appear to speak louder than words
MA NU
(European Central Bank, 2014)4. The analysis provided in this paper is unique, in that it provides a statistical examination of the differential impact of central bank actions and statements in the Australian equity market.
Additionally, although it could be assumed that the effect of monetary policy in Australia
ED
would be consistent with other jurisdictions, Australia’s equity market composition, financial structure5 and openness are substantially different from its US and European counterparts. For
PT
example the market composition of the Australian equity market is more cyclical with 27.4% of GDP
CE
produced by industry (mining, manufacturing, energy production, and construction) as opposed to 19.5% in the US6 and its financial system is less fragmented7; therefore the impact of monetary
AC
policy via the interest rate channel is expected to be more pervasive. In addition, the openness of the Australian economy8 may elicit a response to monetary policy via the exchange rate channel in
4
According to ECB Board member Mr Peter Praet in his speech to the ECB and its Watchers XV (2014) “Communication is always key for effective monetary policy-making. This is true in normal times, but the benefits of good communication are greatly increased in difficult times. And yet, we should also be aware of the limits of communication. It is no substitute for action.” (pg. 2)
5
According to Georgiadis (2014) the impact of unexpected monetary policy differs across jurisdictions due to a country’s financial structure and market composition. 6
These statistics have been provided by the CIA (2015)
7
Australia has 169 financial institutions (APRA, 2015) compared to the US with 6,463 (FDIC, 2015).
8
According to the OECD ‘Trade Openness’ measure (OECD, 2015), the average of total exports and imports as a percentage of GDP, Australia (20.1%) is a far more open economy than the US (12.6%).
6
ACCEPTED MANUSCRIPT the Australian equity market. Such a response has not been identified in the US or European equity markets.
T
Using a ten year sample from October 2003 to October 2013, this study finds that both
RI P
monetary policy announcements and explanatory minutes releases have a significant and comparable impact on the returns and volatility of the Australian equity market. Further, distinct
SC
from US and European studies that find strong evidence of the interest rate, bank loan and balance sheet channel (Bernanke and Blinder, 1992; Dedola and Lippi, 2000; Bernanke and Kuttner, 2003;
MA NU
Ehrmann and Fratzscher, 2004; Bernanke and Kuttner, 2005; Basistha and Kurov, 2008; Maio, 2014) and no evidence of the exchange rate channel (Peersman and Smets, 2005), this paper finds that monetary policy impacts the Australian equity market via the exchange rate, interest rate and bank loan channels of monetary policy with only weak evidence of the balance sheet channel of monetary
ED
policy. These channels are found to be operating irrespective of the trigger (monetary policy announcement or explanatory minutes’ release), though results are somewhat weaker when
PT
examining the explanatory minutes’ release.
CE
The paper proceeds as follows. Section 2 presents the data and research design. Section 3
AC
presents the results. Section 4 summarises the paper.
7
ACCEPTED MANUSCRIPT 2
Data and Research Design
2.1
Data
T
Monetary policy announcement release dates were obtained from the Reserve Bank of
RI P
Australia (RBA) for the period from October 2003 to October 2013.9 These announcements are currently released at 2:30 pm on the first Tuesday of the month (excluding January when the
SC
board does not meet), following the RBA’s monthly board meeting, regardless of whether the
MA NU
cash rate changes.10 Information pertaining to the release of the explanatory minutes of the monthly RBA board meeting was also obtained from the RBA for the period commencing in December 2007 and ending in October 2013. Since December 2007 these minutes have been released two weeks after the RBA board meeting (that is, the third Tuesday of the month except
ED
January) and are held under embargo until 11:30 am. Consequently, the sample comprises: 111 monetary policy announcements, 31 occasions when the target interbank cash rate was changed (17
PT
rate increases and 14 rate decreases) and 80 occasions where no change was recorded; and 65
CE
explanatory minutes’ releases.
To capture the speed, persistence and variation of the impact of monetary policy on
AC
the Australian equity market, intraday data for the 30-day interbank cash rate, the ASX SPI200 futures contract and the S&P/ASX 200 Index were obtained from SIRCA’s Thomson Reuters Tick History database. This data is reported at ten minute intervals, with the contract/index price being the last traded price each time interval.
9
We begin the analysis in October 2003 to coincide with the commencement of the 30-day interbank cash rate futures contract on the Sydney Futures Exchange which was introduced in September 2003.
10
This practice however has not always been the case. From August 1990 (when rate targeting began) to November 1998, monetary policy announcements occurred at 9:30 am on the day of the cash rate change. This day was not necessarily the day after the RBA board meeting. Further, if there was no change in the cash rate, no statement was released. From December 1998, statements indicating a change were always released the day after the board meeting, but it was not until September 2002 that the RBA began releasing a statement after a no-change announcement.
8
ACCEPTED MANUSCRIPT Business cycle proxies, used to examine the interest rate and bank loan channels of monetary policy, were obtained from the Australian Bureau of Statistics (ABS) and the
T
Organisation for Economic Co-operation and Development (OECD), respectively. Australia’s
RI P
gross national income (GNI) was obtained from the ABS for the period October 2003 to October 2013. This data is reported quarterly in March, June, September and December
SC
with a one period lag. A leading indicator of Australian economic activity was also obtained
MA NU
from the OECD. This data is reported monthly with a three month lag. Balance sheet data, used to examine the balance sheet channel of monetary policy, was obtained from the S&P Capital IQ database for the constituents of the S&P/ASX 200 Index. This database comprises financial statement data and corporate announcements that
AC
CE
PT
ED
have been released publically via the Australian Securities Exchange.
2.2 Modelling the Australian equity market response to unexpected monetary policy announcements and explanatory minutes’ releases
9
ACCEPTED MANUSCRIPT 2.2.1 Impact on return We begin our analysis by employing an event study methodology to examine the response
T
of the Australian equity market to monetary policy announcements and explanatory minutes’
(1)
SC
RI P
releases, using the following equation11:
where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures
MA NU
contract) using ten minute intervals from t-10 to t and it represents the unexpected component of a monetary policy announcement and separately the explanatory minutes’ release. This regression is conducted using the ASX SPI200 futures contract for the full sample period (October 2003 to October 2013) and two sub-sample periods. These sub-sample periods are partitioned at December
ED
2007 due to the change in the RBA’s disclosure practices at this time. 12 In contrast, due to the operating hours of the Australian Securities Exchange (ASX) the analysis involving the S&P/ASX 200
PT
Index only covers February 2008 (December 2007) to October 2013 for monetary policy
CE
announcements (explanatory minutes’ releases). 13 The return on the ASX SPI200 futures contract and the implied return of the S&P/ASX 200
AC
Index are calculated as the percentage change of the last traded prices in each ten-minute interval. Further, to ensure the timeliness and accuracy of the sample, stale prices are screened
11
This methodology is consistent with Bernanke and Kuttner (2005), Kim and Nguyen (2008) and Basistha and Kurov (2008).
12
In December 2007 the RBA: changed the timing of the monetary policy announcement from 9.30am the day after the RBA board meeting to 2.30pm the day of the RBA board meeting; and began to release the minutes of the RBA board meeting two weeks after the monetary policy announcement. 13
As the S&P/ASX 200 Index is only traded during the day between the hours of 10am and 4pm, announcements prior to February 2008, which occurred at 9.30am, cannot be examined.
10
ACCEPTED MANUSCRIPT by excluding any observation where a trade is not reported at each ten-minute interval during the event window (-10,+60). The remaining observations constitute the screened sample. 14
T
Consistent with extant literature (Kuttner, 2001; Bernanke and Kuttner, 2005) the
RI P
unexpected component of the monetary policy announcement is calculated using the near-term 30-day interbank cash rate futures contract, a priori the superior proxy for the interbank cash
SC
rate. 15 This calculation is the difference between the ‘last traded’ price of the near-by 30-day interbank cash rate futures contract in the first minute of trade following the announcement
MA NU
and the ‘last traded’ price in the last minute of trade prior to the announcement. The calculation of the unexpected component of the explanatory minutes’ release differs from the monetary policy announcement, as the second contract in the 30-day interbank cash rate futures is used instead of the near-term contract. The second contract is used due to
ED
liquidity issues caused by the absence of profitable trading opportunities in the near-term
PT
contract once the RBA releases the monthly target interbank cash rate (on the first Tuesday of
CE
the month) and the market has adjusted to the new theoretical price (Smales 2012b). Endogeneity and simultaneity are controlled for by performing this analysis in a narrow
AC
event window.16 This window, which covers ten minutes before and sixty minutes after the event (t-10 to t+60, where t0,9 is the interval in which the event occurs), is designed to capture the speed of the transmission and any variation in the response. Finally, heteroskedasticity in all OLS regressions is controlled for by applying a Huber-White adjustment and trimming outliers from
14
The screened sample consists of 73 (65) monetary policy announcements and 40 (65) explanatory minutes’ releases using the ASX SPI200 futures contract (S&P/ASX 200 Index). 15
Kuttner (2001) and Bernanke and Kuttner (2005) advocate the use of intra-day Fed funds futures contract data to calculate the surprise component due to the accuracy and timeliness of the data and the parsimony of the model produced. 16
By limiting the size of the event window we can limit the possibility of other information impacting our analysis.
11
ACCEPTED MANUSCRIPT the data by excluding any change in the implied yield of the 30-day interbank cash rate futures
T
contract greater than three standard deviations from the mean.17
RI P
2.2.2 Differential impact of unexpected monetary policy announcements and explanatory minutes’ releases
SC
As separate events, the differential impact of monetary policy announcements and explanatory minutes’ releases can be statistically determined. This is done by combining all
MA NU
monetary policy announcements and explanatory minutes’ releases from December 2007 to October 201318 into a single sample, then adding a dummy variable to identify the event type as
(2)
ED
specified in the following equation:
PT
where dEMR is set to one for an explanatory minutes’ release and zero for a monetary policy
CE
announcement. The implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract), Rt, is calculated using ten minute intervals (t0,9 - t-10,-1) to allow the detection of any variation in the
AC
coefficients of β2 and β3.
2.2.3 Impact on volatility To study the volatility response of the Australian equity market to unexpected monetary policy announcements and explanatory minutes’ releases, an exponential general autoregressive
17
The impact of trimming data is minimal with 2 observations removed from the monetary policy announcement sample when using the ASX SPI200 futures contract and 2 observations removed from the monetary policy announcement and explanatory minutes’ release sample when using the S&P/ASX 200 Index. This analysis is also performed using the entire sample. Results obtained are not substantially different. 18
As the release of the explanatory minutes only began in December 2007, the sample period is limited to December 2007 to October 2013 so the comparison of the two events (monetary policy announcements and explanatory minutes’ releases) is valid.
12
ACCEPTED MANUSCRIPT conditional heteroskedastic (EGARCH) model using a student t distribution is employed. 19 This model is advocated by Nelson (1991) and frequently employed in studies of monetary policy (Kim
T
and Nguyen, 2008; Smales, 2012a). This is due to its ability to not only report on the magnitude and
extant asymmetry between positive and negative news. 20
RI P
persistence of the impacts of unexpected announcements and releases on volatility, but also on any
SC
The EGARCH (1,1) model is specified by the following conditional mean and variance
MA NU
equations:
(3)
(4)
ED
where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract) using ten minute intervals from t-10 to t, Rt-1 represents the ten-minute lagged implied
PT
return (return), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release, and dt is a vector of dummy variables that take
CE
the value of one in each ten minute interval t (from t-10 to t+60), or zero otherwise.
AC
The interaction term (dt(0,9)×it) indicates the magnitude of the mean response to unexpected announcements / releases and the dummy variable dt indicates the timing of the volatility response. Further, the magnitude of the volatility response is indicated by the significance and sign of β1, persistence by β and any extant asymmetry by β2.
19
After confirmation of the presence of an ARCH effect in the returns of the ASX SPI200 futures contract and the implied returns of the S&P/ASX 200 Index, comparison of the Akaike information criterion (AIC), Schwarz information criterion (SIC) and log likelihood function supports the use an EGARCH model with a Student t distribution. Additionally this distribution has no remaining ARCH effects or serial correlation. 20
This is necessary to test for Black’s (1976) ‘leverage effect’, whether negative shocks in the equity market generate more volatility than positive shocks.
13
ACCEPTED MANUSCRIPT 2.3 Determining the channels of monetary policy in the Australian equity market To examine the exchange and interest rate channels of monetary policy in the Australian
T
equity market we test for a differential impact in multinational companies and cyclical industries,
RI P
respectively. Further, inconsistency in the response of equity returns to monetary policy due to a firm’s financial position and economic cycles is examined in order to ascertain evidence of the credit
MA NU
SC
channels of monetary policy, namely the balance sheet and bank loan channels respectively.
2.3.1 The exchange rate channel of monetary policy Monetary policy is proposed to operate through the exchange rate channel of monetary policy when changes to or revised expectations of the target interbank cash rate influence demand
ED
for domestic deposits (RBA, 2014). The change in demand for domestic deposits has a direct impact
PT
on foreign exchange prices, which in turn affects aggregate demand, net exports and asset prices. To test whether monetary policy affects equity returns via the exchange rate channel, the impact of
CE
monetary policy is compared across domestic firms (those firms with no exchange risk exposure) and multinational firms (those firms with exchange risk exposure). 21 If the exchange rate channel is
AC
operating in the Australian equity market, multinational firms should demonstrate a larger response to monetary policy.
Consistent with Choi and Prasad (1995), a multinational firm is defined as a firm with a market capitalisation of $1 million or more which possesses foreign assets or generates foreign revenue that comprise 25% or more of their respective balance sheet totals. Disaggregated panel data based on the constituents of the S&P/ASX 200 Index constitute the basis of this analysis which is performed via the following equation: (5) 21
Exchange risk exposure refers to a firm’s susceptibility to fluctuations in exchange rates which may affect the value of a firm through transaction, translation and economic risk factors.
14
ACCEPTED MANUSCRIPT
where Ri,t represents the return of firm i using ten minute intervals (t0,9 - t-10,-1), it represents the
T
unexpected component of the monetary policy announcement and separately the explanatory
RI P
minutes’ release and the dummy variable dMN is equal to one for a multinational firm, determined by the proportion of foreign-held assets or foreign-generated revenue, or zero otherwise.
SC
If the impact of monetary policy on multinational firms is shown to be larger, as represented
MA NU
by a negative and significant coefficient at β3, this will indicate the presence of the exchange rate channel of monetary policy in the Australian equity market.
To determine whether the exchange rate channel is more prevalent in particular sectors and firm sizes, the sample is partitioned based on the eleven S&P/ASX 200 sectors and three size
ED
portfolios (small: lowest tercile of companies by market capitalisation, medium: next tercile of companies by market capitalisation, large: largest tercile of companies by market capitalisation).
(6) (7)
AC
CE
PT
Differences are tested using the following equations:
where dsector is a vector of dummy variables set equal to one for each S&P/ASX 200 sector or zero otherwise, and dsize is a vector of dummy variables set equal to one for each size portfolio or zero otherwise. To avoid perfect multicollinearity, the materials sector and small size portfolio are omitted from the equations. Therefore the response of multinational firms in this sector and size portfolio respectively will be indicated by the coefficient at β3. For all other sectors and size portfolios, differences in the impact of monetary policy on multinational firms will be indicated by a significant coefficient at β5.
15
ACCEPTED MANUSCRIPT 2.3.2
The interest rate channel of monetary policy Monetary policy is proposed to operate through the interest rate channel of monetary policy
T
when changes to or revised expectations of the target interbank cash rate influence real interest
RI P
rates (RBA, 2014). This in turn affects a firm’s cost of capital, alters spending patterns and ultimately aggregate demand and asset prices. To test whether monetary policy affects equity returns via the
SC
interest rate channel, the impact of monetary policy is compared across cyclical and non-cyclical industries. If the interest rate channel is pervasive in the Australian equity market, industries that
MA NU
are cyclical should have a stronger response to monetary policy.
In order to ascertain a ranked order of cyclicality of Australian industries this study employs a methodology consistent with Peterson and Strongin (1996), which defines the cyclicality of an
ED
industry as β in the following equation:
(8)
PT
where Ri,t represents the implied return of the S&P/ASX 200 sector index i and GNIt represents the
CE
latest percentage change in Australian gross national income (GNI). The coefficient β in this context measures the sensitivity of each sector index i to cyclical changes of the GNI and thus by ordering
cyclicality.22
AC
the magnitude of this coefficient from each of the eleven sector indices establishes a ranked order of
The ranked order of cyclicality is then compared and contrasted with the ranked order of the response to unexpected monetary policy announcements and explanatory minutes’ releases for each sector index i as determined by the following equation: (9)
22
This empirical identification of cyclical industries is believed to be a more robust method of determining evidence of the interest rate channel of monetary policy, as opposed to prior studies that use arbitrary measures of cyclicality (for example Bernanke and Kuttner, 2003; Ehrmann and Fratzscher, 2004; Basistha and Kurov, 2008).
16
ACCEPTED MANUSCRIPT where Ri,t represents the implied return of the S&P/ASX 200 sector index i using ten minute intervals (t0,9 - t-10,-1) and it represents the unexpected component of the monetary policy announcement
T
and separately the explanatory minutes’ release. The coefficient β in this context measures the
RI P
response of each sector index i to unexpected monetary policy announcements and separately explanatory minutes’ releases and thus by ordering the magnitude of this coefficient from each of
SC
the eleven sector indices establishes a ranked order of response. To compare the two ranked
MA NU
datasets a Spearman rank correlation test is employed and to contrast, a Wilcoxon signed rank test. If the ranked order of cyclicality is correlated or not statistically different to the ranked order of response, it can be inferred that the response of cyclical industries to monetary policy announcements and releases is stronger, thereby confirming the presence of the interest rate
The credit channel of monetary policy
PT
2.3.3
ED
channel of monetary policy.
CE
Monetary policy is proposed to operate through the credit channel of monetary policy when changes to or revised expectations of the target interbank cash rate affects a firm’s external finance
AC
premium23 and thus its value (Bernanke and Gertler, 1995). This effect on equity returns operates via two distinct channels. The first, the balance sheet channel, occurs when changes to monetary policy affects a firm’s financial position (for example their balance sheet, income statement and cash flow statement), which in turn affects the firm’s borrowing capacity, its ability to obtain external finance and ultimately its value. Due to their heavy reliance on external debt, financially constrained firms are believed to be most susceptible to this channel of monetary policy and their response duly amplified (Ehrmann and Fratzscher, 2004). To test whether monetary policy affects equity returns
23
The external finance premium is the additional cost incurred by firms raising funds externally (by issuing shares or debt) as opposed to costs from raising funds internally (via earnings).
17
ACCEPTED MANUSCRIPT via the balance sheet channel, the response of financially constrained and unconstrained firms to both monetary policy announcements and explanatory releases are compared.
T
The second channel, the bank lending channel, focuses on the effect monetary policy has on
RI P
the availability and cost of loans.24 As loan availability is generally pro-cyclical, a firm’s response to monetary policy should be affected by economic cycles. To test whether monetary policy affects
SC
equity returns via the bank loan channel, a firm’s response to monetary policy is compared across different phases of an economic cycle.
MA NU
As both the balance sheet and bank loan channels of monetary policy require the use of firm-specific data, disaggregated panel data based on the constituents of the S&P/ASX 200 Index forms the basis for this analysis.
ED
Balance sheet channel
To test for the presence of the balance sheet channel, this study follows the methodology of
CE
PT
Basistha and Kurov (2008) and estimates the following equation: (10)
AC
where Ri,t represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1) and it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release. The dummy variable dFC is set equal to one for firms that have been identified as financially constrained, and zero otherwise. Consistent with Ehrmann and Fratzscher (2004) and Basistha and Kurov (2008) a firm is identified as financially constrained based on multiple proxies from financial statement data25 to address any errors in the variables. These proxies include
24
Deng and Liu (2014) provide evidence of this effect in Australian banks. However, Salah and Fedhila (2014) assert that the use of securitisation as a substitute for liquid assets and the increase in capital requirements to “insure the solidarity of the banking system” (pg.182) has resulted in a reduction in effectiveness of monetary policy to influence bank lending. 25 By using predetermined annual data to construct financial constraint proxies issues of simultaneity are avoided as the data is exogenous to intraday stock returns.
18
ACCEPTED MANUSCRIPT a firm’s size, short-term to total debt ratio, interest coverage ratio, dividend yield, book to market ratio, debt to equity ratio and liability to assets ratio.
T
Firm size based on market capitalisation is a commonly used proxy for financial constraint
RI P
(Ehrmann and Fratzscher, 2004; Peersman and Smets, 2005; Basistha and Kurov, 2008), with smaller firms identified as having limited access to alternative forms of finance due to information, agency
SC
and borrowing costs. This study therefore classifies the bottom quartile26 of firms ranked on market value as financially constrained. Additionally, this study classifies the top quartile of firms ranked
MA NU
according to the ratio of short-term debt to total debt and the bottom quartile of firms ranked by the interest coverage ratio as financially constrained. These firms are more financially constrained due to their reliance on short term debt and a lack of liquidity (Peersman and Smets, 2005). The top quartile of firms ranked according to their dividend yield, are also classified as
ED
financially constrained. This classification is due to the sensitivity of such firms to revisions in earnings expectations based on changes to monetary policy (Ehrmann and Fratzscher, 2004). For
PT
example, a firm with a high dividend yield may find it difficult to maintain these dividends if
CE
monetary policy contracts and interest rates rise. Value firms are considered to be more financially constrained than growth firms due to their
AC
high level of interest rate risk (Maio, 2014).27 Therefore the top quartile of firms, ranked on their book to market ratio, are classified as financially constrained. Finally, highly leveraged firms or firms from the top quartile of the leverage ratios, debt to equity and liability to assets, are classified as financially constrained. This is based on the assumption that highly leveraged firms experience greater difficulties obtaining and maintaining external finance and therefore are more financially constrained (Peersman and Smets, 2005).
26
Various portfolio structures were tested including a 30/40/30 and 10/80/10 split as well as equally weighted and value weighted portfolios. All alternatives yielded similar results. 27
Maio (2014) claims that “value stocks have more negative betas against short-term interest rates than growth stocks” (pg. 3) and therefore are more sensitive to monetary policy.
19
ACCEPTED MANUSCRIPT As well as undertaking portfolio analysis, a series of cross-sectional regressions are used to measure the continuous relationship between each of the seven financial constraint proxies and
RI P
T
equity returns, as per the following equation: (11)
SC
where Ri,t represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1) and it represents the unexpected component of the monetary policy announcement and separately the
MA NU
explanatory minutes’ release. The variable FCv,i is a vector of continuous variables used to proxy for financial constraint based on company i’s size, short-term to total debt ratio, interest coverage ratio, dividend yield, book to market, debt to equity and liability to assets ratios, each estimated separately.
ED
The presence of the balance sheet channel of monetary policy would be confirmed by a
PT
significant coefficient at β2 and / or β3 in Equations 10 or 11. These values represent the additional impact of unexpected monetary policy announcements or explanatory minutes’ releases on
AC
Bank loan channel
CE
financially constrained firms.
To test for the presence of the bank loan channel, in addition to the balance sheet channel, this study again applies the methodology of Basistha and Kurov (2008) and includes an additional independent variable in Equations 10 and 11 to account for alternating economic cycles, as per the following equations: (12) (13)
20
ACCEPTED MANUSCRIPT where the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and
T
is set to zero otherwise.28
RI P
The Global Financial Crisis period is defined using both an exogenous source (ABS, 2013) and a Bai and Perron (1998) breakpoint test. The former defines the Global Financial
SC
Crisis period as July 2008 to March 2009; and the latter as the 3rd of September, 2007 to the 9th of March, 2009. An expansionary (contractionary) phase of the business cycle is
MA NU
identified when the twelve month moving average of the OECD leading indicator index for Australia is greater than (below) the index value at the time of the announcement or release and a contractionary (expansionary) monetary policy regime when the target interbank cash
ED
rate is rising (falling).
If crisis (contractionary) periods are shown to affect the impact of unexpected monetary
PT
policy announcements and explanatory minutes’ releases, providing evidence of the bank loan
CE
channel, significance should be found for the coefficients at β2 and / or β3. Significant coefficients at β4 and β5 will represent the additional impact of unexpected monetary policy announcements or
AC
explanatory minutes’ releases on financially constrained firms during normal times and a significant coefficient at β6, will represent any additional impact during crisis (contractionary) periods. It is expected that the response of financially constrained firms will be amplified in crisis (contractionary) periods if the balance sheet channel is prevalent (Basistha and Kurov, 2008).
3
Results This section is divided into two parts. First the impact of unexpected monetary policy
announcements and explanatory minutes’ releases on the Australian equity market is examined in
28
Basistha and Kurov (2008) also include an industry dummy in this regression, however for brevity this dummy is excluded from this analysis. Estimation of this equation including the dummy industry variable yields similar results to those reported.
21
ACCEPTED MANUSCRIPT Section 3.1. Secondly, in Section 3.2 this study determines the channels of monetary policy in the
3.1
MA NU
SC
RI P
T
Australian equity market.
Response to unexpected monetary policy announcements and explanatory
PT
3.1.1 Impact on return
ED
minutes’ releases
The results presented in Table 1, Panel A demonstrate that the impact of unexpected
CE
monetary policy announcements and explanatory minutes’ releases on the Australian equity market
AC
is immediate (within ten minutes), negative and significant.29
Specifically, an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to a 0.1149% decrease (increase) in the return of the ASX SPI200 futures contract and a 0.0645% decrease (increase) in the implied return of the S&P/ASX 200 Index. As the RBA generally increases or decreases the target interbank cash rate in 25 basis point increments, this result may be
29
These results are consistent with extant international studies (Bernanke and Kuttner, 2003; Ehrmann and Fratzscher, 2004; Basistha and Kurov, 2008) that document a negative relationship between unexpected target cash rate changes and stock prices.
22
ACCEPTED MANUSCRIPT contextualised as an unexpected 25 basis point tightening (easing) prompting a 0.0287% decrease (increase) in the ASX SPI200 futures contract price and a 0.0161% decrease (increase) in the
RI P
these findings, despite the change to the announcement time.30
T
S&P/ASX 200 Index. The results from the two sub sample periods presented in Panel B and C confirm
Similarly, an unexpected 100 basis point increase (decrease), derived from the information
SC
content of the explanatory minutes, leads to a 0.2441% decrease (increase) in the ASX SPI200
MA NU
futures contract and a 0.2073% decrease (increase) in the S&P/ASX 200 Index.
3.1.2 Differential impact of unexpected monetary policy announcements and explanatory minutes’ releases To test whether the unexpected information content of an explanatory minutes’ release
ED
elicits a distinct response from the Australian equity market when compared to an unexpected
PT
monetary policy announcement, we examine the differential impact of monetary policy announcements and explanatory minutes’ releases on the Australian equity market, as reported in
CE
Table 2.
AC
The absence of significance on the dummy variable (β2) and interacted term (β3) for both the ASX SPI200 futures contract and S&P/ASX 200 Index demonstrates that there is no significant difference in the impact of unexpected monetary policy announcements and explanatory minutes’ releases on Australian equity market returns. This suggests that there is no difference between monetary policy actions and statements in terms of their ability to move market prices and
30
As a further robustness test, additional regression analysis was performed to compare the results of the pre and post sample, particularly due to the difference in magnitude of the coefficients. This analysis found no statistically significant difference between the pre and post periods.
23
ACCEPTED MANUSCRIPT moderate economic activity. This finding has significant implications for central bank officials
T
regarding the application of monetary policy to achieve a target cash rate.
RI P
3.1.3 Impact on volatility
The results of the EGARCH model, reported in Table 3, indicate that monetary policy
SC
announcements and explanatory minutes’ releases elicit a significant change in the volatility of the
MA NU
Australian equity market.
ED
The magnitude (β1) and persistence (β) of volatility following a monetary policy announcement and explanatory minutes’ release is shown to be significant and comparable.
PT
Specifically, the magnitude following an unexpected monetary policy announcement (explanatory minutes’ release) using the ASX SPI200 futures contract is 0.4304 (0.4190) and the persistence is
CE
0.7903 (0.8240). Of note, the response of the S&P/ASX 200 Index is larger, with a magnitude of
AC
7.5127 (7.5343). Further, the absence of significance at β2 denotes that the response is symmetric. That is, both positive and negative shocks generate the same level of volatility in the Australian equity market.31
The timing of the response, as indicated by the sign and significance of the dummy variable dt is shown to vary between the two events and the two equity market proxies. Specifically, volatility in the ASX SPI200 futures contract is elevated in the ten minutes prior to the monetary policy announcement (t-10,-1), reaching a maximum at event time (t0-9) and returning to normal levels after forty minutes. The impact of the explanatory minutes’ release is however not as lengthy, with the statistically significant increase in volatility limited to the first ten minutes after the release. 31
Of note, the coefficient of β2 is generally negative, which implies (although not statistically significant) that negative shocks generate more volatility in the Australian equity market. This interpretation is consistent with Black’s (1976) ‘leverage effect’.
24
ACCEPTED MANUSCRIPT Finally, using the S&P/ASX 200 Index, this study finds a statistically significant increase in volatility in the ten minutes after monetary policy announcements, but no evidence of abnormal
T
volatility in the ensuing ten minute intervals. In contrast, there is no evidence of a significant change
RI P
in the volatility of the S&P/ASX 200 Index after explanatory minutes’ releases. Assessed together, the evidence suggests that the monetary policy announcement has a more protracted impact on
SC
volatility than the explanatory minutes’ release in the Australian equity market. This suggests that unexpected central bank actions, rather than statements, are more disruptive in the Australian
MA NU
equity market.
ED
3.2 Determining the channels of monetary policy in the Australian equity market
3.2.1 The exchange rate channel of monetary policy
PT
Table 4 reports that multinational firms have a greater sensitivity to monetary policy announcements and explanatory minutes’ releases as demonstrated by a significantly larger
CE
response. This result supports the notion that Australian monetary policy acts through the exchange
AC
rate channel, affecting equity prices via its impact on exchange rates, potentially due to the openness of the Australian economy.32
This result is contrary to the findings of Peersman and Smets (2005) for members of the European Union, who find no evidence of the exchange rate channel, and is shown in Panel A by negative and significant coefficients at β3 for both multinational firm proxies (assets and revenue) when examining the impact of the monetary policy announcement. Specifically, these results 32
According to the OECD ‘Trade Openness’ measure, the average of total exports and imports as a percentage of GDP, Australia (20.1%) is a far more open economy than the US (12.6%).
25
ACCEPTED MANUSCRIPT demonstrate that an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to a 0.0850% decrease (increase) in the returns of domestic firms, plus an additional 0.0314%
T
decrease (increase) in the returns of multinational firms identified using the percentage of foreign
RI P
held assets. Similarly, an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to a 0.0898% decrease (increase) in the returns of domestic firms, plus an additional
SC
0.0193% decrease (increase) in the returns of multinational firms identified using the percentage of foreign generated revenue. Further, the response of the Australian equity market to an explanatory
MA NU
minutes’ release is shown to be driven by multinational firms who have in excess of 25% of their revenue generated overseas.
Partitioning of the sample into sectors, using foreign held assets as the multinational firm proxy, to examine the impact of the monetary policy announcement (reported in Panel B)
ED
demonstrates that the AREITS and utilities sectors are significantly more exposed to the exchange rate channel, whilst the consumer staples and information technology sectors are significantly less
PT
exposed. This is indicated by the negative (positive) and significant coefficients of the AREITS and
CE
utilities (consumer staples and information technology) sectors at β5, which when added to the β1 and β3 coefficients indicates a more amplified (muted) response.
AC
Further partitioning of the sample based on the size of the firm (reported in Panel C) demonstrates that small (0.0969%) firms have a larger exposure to the exchange rate channel than medium (0.0248%) and large (0.0101%) firms. This result is confirmed when using foreign generated revenue as the multinational firm proxy and could be explained by the superior ability of larger firms to hedge exchange rate risk exposures. Conversely, partitioning of the sample into sectors and firm sizes presents no significantly comparable results for explanatory minutes’ releases. This could however be a result of the reduced
26
ACCEPTED MANUSCRIPT sample size as results, although not significant, are consistent in direction and magnitude to those
RI P
3.2.2 The interest rate channel of monetary policy
T
reported for the monetary policy announcement.33
SC
Table 5 reports that cyclical industries have a greater sensitivity to monetary policy announcements and explanatory minutes’ releases. This result supports the notion that monetary
MA NU
policy acts through the interest rate channel, affecting equity prices via its impact on interest rates.
ED
This is demonstrated in Panel C of Table 5 where a strong positive correlation (0.78) is
PT
reported between the ranked response (highest to lowest) of each S&P/ASX 200 sector to monetary policy announcements and the ranked response (highest to lowest) of each S&P/ASX200 sector to
CE
Australia’s gross national income (GNI), which provides a ranked order of cyclicality.34 These results indicate that sectors with the largest response to monetary policy announcements also tend to be
AC
the most cyclical sectors. The differential impact of monetary policy across sectors with different sensitivities to the broad economy is confirmed using a Wilcoxon signed rank test which reports an insignificant z score of -0.94. This suggests that there is no significant difference between the two ranked datasets: the ranked order of response and the ranked order of cyclicality. The correlation between the ranked response of each S&P/ASX 200 sector to explanatory minutes’ releases and the ranked response (highest to lowest) of each S&P/ASX 200 sector to
33
The sample for monetary policy announcements extends from October 2003 to October 2013 and comprises 111 announcements. The sample for explanatory minutes’ releases extends from December 2007 to October 2013 and comprises 65 announcements. 34
Panel A and B of Table 5 report the response of each S&P/ASX 200 sector to monetary policy announcements, explanatory minutes’ releases and Australia’s gross national income (GNI).
27
ACCEPTED MANUSCRIPT Australia’s gross national income (GNI), is relatively weak (0.22) but the direction is consistent. Further, the Wilcoxon signed rank test confirms that there is no significant difference between the
RI P
T
two rankings, with an insignificant z-score of 0.24.
SC
3.2.3 The credit channel of monetary policy
The credit channel of monetary policy consists of two distinct channels: the balance sheet
MA NU
channel and the bank loan channel. Whilst this study provides evidence in Tables 6 to 10 of both channels of monetary policy, demonstrated by the significantly larger response of financially constrained firms (balance sheet channel) and firms during crisis and contractionary periods (bank loan channel), the bank loan channel appears to be the most prevalent. This result supports the
ED
notion that monetary policy acts through the credit channel, affecting equity prices via its impact on
PT
interest rates which in turn affect a firm’s financial position and loan availability. Based on the methodology of Basistha and Kurov (2008), this study fails to find any evidence
CE
of the balance sheet channel of monetary policy in the Australian equity market, as reported in Panel A (monetary policy announcement) and Panel B (explanatory minutes’ release) of Table 6. This
AC
is demonstrated by the insignificance of the coefficients at β2 and β3 for the majority of the financially constrained portfolios.35 Where significance is reported, in the size (0.0168*) portfolio, the coefficient is positive and therefore indicates that the impact of unexpected monetary policy announcements on this portfolio is weaker. Alternatively, as there is only evidence of significance in one out of the seven subsamples, this result could be attributed to type 1 error.
35
This result is consistent with Warner and Georges (2001) who report no evidence of the balance sheet channel in stock returns. Of note, the sample period examined by Warner and Georges (2001), 1990 to 1991, covered the US credit crunch, whereas the sample period in this study includes the Global Financial crisis, both occasions when theoretically the response from financially constrained firms should be amplified.
28
ACCEPTED MANUSCRIPT
The use of a continuous variable, rather than portfolios, to identify financially constrained
T
firms however yields some evidence of the balance sheet channel of monetary policy in the
RI P
Australian equity market. This is reported in Panel C of Table 6. Specifically these results indicate that an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to an
SC
additional 0.0325%, 0.0077%, 0.0382% decrease (increase) in the returns of financially constrained firms based on their book to market, dividend yield and liability to assets ratio respectively.
MA NU
Conversely, explanatory minutes’ releases do not appear to affect equity prices through the balance sheet channel, as financially constrained firms do not elicit a stronger reaction to explanatory minutes’ releases in any of the portfolios examined in Panel D of Table 6.
ED
In contrast, irrespective of the proxy used to account for alternating economic cycles: the Global Financial Crisis (endogenously or exogenously defined); phases of the business cycle or
PT
monetary policy regimes, evidence of the bank loan channel of monetary policy is present in the Australian equity market. This is demonstrated initially by the negative and significant coefficients of
CE
β2 and β3 in Panels A, B and C of Table 7 which reports the additional impact of monetary policy
(2008).
AC
announcements in crisis and contractionary periods using the methodology of Basistha and Kurov
Specifically, these results demonstrate that an unexpected 100 basis point tightening of the target interbank cash rate led to a decrease in the returns of firms of 0.2799% (0.3614%) during the Global Financial Crisis and 0.0399% (0.0399%) during non-crisis periods. This represents an additional decrease in the returns of firms of 0.2400% (0.3215%) during the Global Financial Crisis, as defined endogenously (exogenously). Similarly, the returns of firms during a contractionary phase in
29
ACCEPTED MANUSCRIPT the business cycle (contractionary monetary policy regime) decrease by an additional 0.0775% (0.0905%).
T
Supplementary analysis, conducted to examine the additional impact of unexpected
RI P
monetary policy announcements or explanatory minutes’ releases on financially constrained firms during normal times (Δit×dFC) and during crisis and contractionary periods (Δit×dFC× dEC), failed to
SC
provide any evidence of the balance sheet channel of monetary policy.36 This is demonstrated by insignificant coefficients at β5 and β6 and is consistent with earlier findings which fail to confirm the
MA NU
presence of the balance sheet channel of monetary policy in the Australian equity market using the methodology of Basitha and Kurov (2008).
Further, for robustness, the impact of monetary policy announcements on the returns of
ED
financially constrained firms during crisis and contractionary periods is examined using a continuous variable rather than portfolios to identify financially constrained firms. These results are reported in
CE
PT
Table 8.
AC
As before these results confirm the presence of the bank loan channel with negative and significant coefficients reported at β2 and β3. However the lack of significance at β5 and β6 fails to confirm the presence of the balance sheet channel with only the dividend yield and book to market proxies suggesting some form of amplified response. Repeating this analysis using explanatory minutes’ releases also yields similar results. These results are reported in Table 9 using financially constrained portfolios consistent with Basistha and Kurov (2008) and a continuous variable for the financial constraint proxies in Table 10. 36
It is expected that the response of financially constrained firms will be amplified in crisis and contractionary periods if the balance sheet channel is prevalent (Basistha and Kurov, 2008).
30
ACCEPTED MANUSCRIPT
T
RI P
The results reported in Tables 9 and 10 provide evidence of the bank loan channel during the Global Financial Crisis (Panel A) as indicated by significant and negative coefficients at β2 and β3, but
SC
no similarly robust results during a contractionary phase of the business cycle (Panel B) or a contractionary monetary policy regime (Panels C). What is obvious however, is the absence of proof
MA NU
for the balance sheet channel of monetary policy as denoted by the absence of significance at β5 and β6, irrespective of the methodology used to measure a firm’s financial constraint: portfolios (Table 9)
4
ED
or a continuous variable (Table 10).
Summary
PT
This paper investigates the channels of monetary policy by firstly examining the impact of
CE
central bank actions (monetary policy announcements) and statements (explanatory minutes’ releases) in the Australian equity market and secondly, by determining and comparing the channels
AC
of monetary policy triggered by these events. Using data from October 2003 to October 2013 this study finds that both monetary policy announcements and explanatory minutes’ releases have a significant impact on the returns of the Australian equity market. Specifically, an unexpected 100 basis point tightening (easing) of the target interbank cash rate leads to a 0.1149% decrease (increase) in the return of the ASX SPI200 futures contract and a 0.0645% decrease (increase) in the implied return of the S&P/ASX 200 Index. Similarly, an unexpected 100 basis point increase (decrease), derived from the information content of the explanatory minutes, leads to a 0.2441% decrease (increase) in the return of the ASX SPI200 futures contract and a 0.2073% decrease (increase) in the implied return of the S&P/ASX 200 Index. When the impacts of these two events are statistically compared, no discernible difference is found.
31
ACCEPTED MANUSCRIPT Further, the magnitude and persistence of the volatility response to monetary policy announcements and explanatory minutes’ releases are significant, comparable and symmetric. The
T
timing of the volatility response however is shown to vary between the two events and the two
impact on volatility than the explanatory minutes’ release.
RI P
equity market proxies, with the monetary policy announcement demonstrating a more protracted
SC
Finally, distinct from US and European studies that find strong evidence of the interest rate, bank loan and balance sheet channel (Bernanke and Blinder, 1992; Dedola and Lippi, 2000; Bernanke
MA NU
and Kuttner, 2003; Ehrmann and Fratzscher, 2004; Bernanke and Kuttner, 2005; Basistha and Kurov, 2008; Maio, 2014) and no evidence of the exchange rate channel (Peersman and Smets, 2005), this paper finds that monetary policy impacts the Australian equity market via the exchange rate, interest rate and bank loan channels of monetary policy, with only weak evidence of the balance
ED
sheet channel of monetary policy. These channels are found to be operating irrespective of the trigger (monetary policy announcement or explanatory minutes’ release), though results are
PT
somewhat weaker when examining the explanatory minutes’ release, with the identification of the
CE
exchange rate channel posited to be due to the openness of the Australian economy.
AC
Collectively these results suggest that central bank actions and statements have a synonymous ability to move market prices and moderate economic activity via all three channels of monetary policy: the exchange rate, interest rate and credit channels Consequently, these findings have significant implications for central bank officials regarding the application of monetary policy to achieve a target cash rate, for this practice, previously thought to be constrained to a single monthly announcement, is demonstrated to be equally affected by the written word as suggested by Oros and Zimmer (2015)37. Moreover the explication of the impact of monetary policy on the Australian equity market provides a valuable resource for financial market participants by comprehensively explaining market response.
37
Oros and Zimmer (2015) suggest that central bank communication could be used to influence expectations and macroeconomic outcomes.
32
ACCEPTED MANUSCRIPT References Australian Prudential Regulatory Authority (APRA) 2015, List of Authorised Deposit-Taking Institutions, Sydney Australia, last viewed 13 March 2015, http://www.apra.gov.au/adi/pages/adilist.aspx
RI P
T
Australian Bureau of Statistics (ABS) 2013, The Global Financial Crisis and its Impact on Australia 2013, Canberra Australia, last viewed 6 August 2013, http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/1301.0Chapter27092009%E2%80%9310
SC
Bai, J & Perron, P, 1998, “Estimating and Testing Linear Models with Multiple Structural Changes”, Econometrica, vol. 66, no. 1, pp. 47-78.
MA NU
Basistha, A & Kurov, A, 2008, “Macroeconomic Cycles and the Stock Market’s Reaction to Monetary Policy”, Journal of Banking and Finance, vol. 32, pp. 2606-2616. Bernanke, B & Blinder, A, 1992, “The Federal Funds Rate and the Channels of Monetary Transmission”, American Economic Review, vol. 82, pp. 901-921. Bernanke, B & Gertler, M, 1995, “Inside the Black Box: The Credit Channel of Monetary Policy Transmission”, Journal of Economic Perspectives, vol. 9, no. 4, pp. 27-48.
ED
Bernanke, B & Kuttner, K, 2003, “What Explains the Stock Market’s Reaction to Federal Reserve Policy?”, Mimeo, Board of Governors and Federal Reserve Bank of New York.
PT
Bernanke, B & Kuttner, K, 2005, “What Explains the Stock Market’s Reaction to Federal Reserve Policy?”, The Journal of Finance, vol. 60, no. 3, pp. 1221-1257.
CE
Black, F, 1976, “Studies of Stock Price Volatility Changes”, Proceedings of the Business and Economics Section of the American Statistical Association, pp. 177–181.
AC
Choi, J & Prasad, A, 1995, “Exchange Risk Sensitivity and Its Determinants: A Firm and Industry Analysis of U.S. Multinationals”, Financial Management, vol. 24, no. 3, pp. 77-88. Central Intelligence Agency (CIA) 2015, The World Fact Book, Washington, USA, last viewed 13 March 2015, https://www.cia.gov/library/publications/the-world-factbook/geos/as.html Dedola, L & Lippi, F, 2000, “The Monetary Transmission Mechanism: Evidence from the Industry Data of Five OECD Countries”, European Economic Review, vol. 49, no. 6, pp. 1543-1569. Deng, X & Liu, L, 2014, “The Bank Lending Channel: Evidence from Australia”, Australasian Accounting, Business and Finance Journal, vol. 8, no. 2, pp. 71-87. Ehrmann, M & Fratzscher, M, 2004, “Taking Stock: Monetary Policy Transmission to Equity Markets”, Journal of Money, Credit and Banking, vol. 36, no. 4, pp. 719-737.
European Central Bank, 2014, Current Issues and Challenges for Central Bank Communication, Frankfurt Germany, last viewed 30 July 2014,
33
ACCEPTED MANUSCRIPT Federal Deposit Insurance Corporation (FDIC) 2015, Key Statistics, Kansas City US, last viewed 13 March 2015, https://www2.fdic.gov/idasp/KeyStatistics.asp?tdate=3/5/2015&pDate=3/4/2015
RI P
T
Georgiadis, G, 2014, “Towards an Explanation of Cross-Country Asymmetries in Monetary Transmission”, Journal of Macroeconomics, vol. 39, pp. 66-84. Guraynak, R, Sack, B & Swanson, E, 2005, “Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Action and Statements”, International Journal of Central Banking, vol. 1, pp. 55-93.
MA NU
SC
Kim, S & Nguyen, D, 2008, “The Reaction of the Australian Financial Markets to the Interest Rate News from the Reserve Bank of Australia and the U.S. Fed”, Research in International Business and Finance, vol. 22, no.3, pp. 378-395. Kuttner, K, 2001, “Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market”, Journal of Monetary Economics, vol. 47, pp. 523-544. Maio, P, 2014, “Another look at the Stock Return Response to Monetary Policy Actions”, Review of Finance, pp. 1-51.
ED
McCredie, B, Docherty, P, Easton, S & Uylangco, K, 2014, “The Differential Impact of Monetary Policy Announcements and Explanatory Minutes Releases on the Australian Interest Rate Futures Market” Pacific-Basin Finance Journal, vol. 29, pp. 261-271.
PT
Nelson, D, 1991, “Conditional Heteroskedasticity in Asset Returns: A New Approach”, Econometrica, vol. 59, no. 2, pp. 347-370.
AC
CE
Organisation for Economic Co-operation and Development (OECD) 2015, Trade Openness, Paris France, last viewed 13 March 2015, http://www.oecdilibrary.org/docserver/download/9211041ec060.pdf?expires=1426404838&id=id&accname=guest& checksum=32309BB5BD92F075DAF90E0ABAAC40E1 Oros, C & Zimmer, B, 2015, “Uncertainty and Fiscal Policy in a Monetary Union: Why does Monetary Policy Transmission Matter?”, Economic Modelling, vol. 50, pp. 85-93. Peersman, G & Smets, F, 2005, “The Industry Effects of Monetary Policy in the Euro Area”, Economic Journal, vol. 115, no. 503, pp. 319-342. Peterson, B & Strongin, S, 1996, “Why Are Some Industries More Cyclical Than Others?”, Journal of Business and Economic Statistics, vol. 14, no. 2, pp. 189-198. Reserve Bank of Australia (RBA), 2014, Monetary Policy, Sydney Australia, last viewed 23 July 2014,
34
ACCEPTED MANUSCRIPT Smales, L, 2012a, “RBA Monetary Policy Communication: The Response of Australian Interest Rate Futures to Changes in RBA Monetary Policy”, Pacific-Basin Finance Journal, vol. 20, no. 5, pp. 793808.
RI P
T
Smales, L, 2012b, “30-Day Interbank Futures: Investigating the Process of Price Discovery Following RBA Cash Target Rate Announcements”, Journal of International Financial Markets, Institutions and Money, vol. 22, pp. 1006-1023.
AC
CE
PT
ED
MA NU
SC
Warner, E & Georges, C, 2001, “The Credit Channel of Monetary Policy Transmission: Evidence from Stock Returns”, Economic Inquiry, vol.30, no.1 pp.74-85.
35
ACCEPTED MANUSCRIPT Tables Table 1 The impact of unexpected monetary policy announcements and explanatory minutes’ releases on the Australian equity market.
Explanatory Minutes’ Release 2 R 0.0533 0.0739* -0.2073* 0.0994 0.0000 0.0001 0.0005 -0.0094 0.0114 -0.0368 0.0183 0.0589 0.0121 0.0355 63
AC
CE
PT
ED
MA NU
SC
RI P
T
Panel A – Full Sample Time to ASX SPI200 futures contract S&P/ASX 200 Index announcement Monetary Policy Explanatory Monetary Policy Announcement Minutes’ Release Announcement 2 2 2 R R R 0.0180 0.0333 0.0423 0.0290 -0.0048 0.0072 βit(-10,-1) -0.1149** 0.2050 -0.2441** 0.1848 -0.0645** 0.2225 βit (0,9) -0.0136 0.0047 0.0132 0.0010 -0.0097 0.0075 βit (10,19) 0.0011 0.0000 0.0418 0.0130 0.0100 0.0113 βit (20,29) 0.0210 0.0144 -0.0074 0.0004 -0.0047 0.0032 βit (30,39) -0.0178 0.0208 0.1012 0.0638 -0.0007 0.0001 βit (40,49) -0.0259 0.0399 0.0842* 0.0837 -0.0134 0.0288 βit (50,59) n 71 40 63 Panel B – Pre sample from October 2003 to December 2007 0.0151 0.0366 βit(-10,-1) -0.1809** 0.2092 βit (0,9) -0.0523 0.0594 βit (10,19) -0.0493 0.0342 βit (20,29) 0.0870 0.1338 βit (30,39) 0.0013 0.0001 βit (40,49) 0.0091 0.0055 βit (50,59) n 33 Panel C – Post sample from February 2008 to October 2013 0.0129 0.0140 βit(-10,-1) -0.1072** 0.2240 βit (0,9) -0.0080 0.0014 βit (10,19) 0.0215 0.0168 βit (20,29) 0.0234 0.0195 βit (30,39) -0.0358 0.0855 βit (40,49) -0.0306 0.0474 βit (50,59) n 38 Note: *, ** denote significance at 5% and 1% respectively and n denotes sample size. Results reported are the coefficients derived from the OLS model described in Equation (1):
(1) where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract) using ten minute intervals from t-10 to t60 and it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release. For the ASX SPI200 futures contract the full sample period covered is from October 2003 to October 2013 for the monetary policy announcement; and December 2007 to October 2013, for the explanatory minutes’ release. For the S&P/ASX 200 Index the full sample period covered is from February 2008 to October 2013 for the monetary policy announcement and December 2007 to October 2013 for the explanatory minutes’ release. Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
36
ACCEPTED MANUSCRIPT
βit
β2(dEMR)
βit×dEMR)
R2
-0.1380 (-1.57)
0.2105
-0.1427 (-1.61)
0.1734
0.0002 (-0.42)
-0.1062 (-2.77)**
-0.0002 (-0.42)
S&P/ASX 200 Index
-0.0001 (-0.31)
-0.0645 (-3.54)**
0.0001 (0.17)
SC
ASX SPI200 futures contract
RI P
T
Table 2 The differential impact of unexpected monetary policy announcements and explanatory minutes’ releases on the Australian equity market.
Note: *, ** denote significance at 5% and 1% respectively. T-statistics are in parentheses.
MA NU
Results reported are the coefficients derived from the OLS model described in Equation (2): (2)
where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract) using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement or explanatory minutes’ release and the dummy dEMR is set to one for an explanatory minutes’ release and zero for a monetary policy announcement.
AC
CE
PT
ED
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
37
ACCEPTED MANUSCRIPT Table 3 The impact of unexpected monetary policy announcements and explanatory minutes’ releases on Australian equity market volatility.
Mean equation c R 2(dt(0,9)×it)
0.0000 -0.0561** -0.0916**
0.0000 -0.0568** -0.1779**
Volatility equation βc Magnitude β1(t-1t-1) Asymmetry β2t-1t-1) Persistence β(logt-1)) β(dt(-10,-1)) β(dt(0,9)) β(dt(10,19)) β(dt(20,29)) β(dt(30,39)) β(dt(40,49)) β(dt(50,59))
-3.5907** 0.4304** 0.0011 0.7903** 0.4982* 1.5850** 0.4940* 0.6684** 0.7825** 0.4193 0.4666
AIC SIC Log Likelihood
12.55 12.55 1995340
T
Monetary Policy Announcement
0.0000 -0.0230** -0.0999*
-3.0054** 0.4190** -0.0004 0.8240** -0.3320 2.2260** 0.3576 0.5994 0.6731 0.6798 0.2665
-0.3727** 7.5127** -0.0895 0.9589** 0.5519 1.2146** -0.2050 0.0288 -0.3346 -0.0949 -1.2950**
-0.3789** 7.5343** -0.0832 0.9581** 0.2931 0.5663 -0.2982 -0.3550 0.3342 0.2315 -0.3045
12.25 12.25 1129048
11.17 11.17 385920.3
11.17 11.16 385852.4
SC
0.0000 -0.0227** -0.0574**
MA NU
ED
Explanatory Minutes’ Release
CE
PT
S&P/ASX 200 Index
RI P
ASX SPI200 futures contract Explanatory Monetary Policy Minutes’ Announcement Release
Note: *, ** denote significance at 5% and 1% respectively.
AC
Results reported are the coefficients derived from the quasi-maximum likelihood estimates of the EGARCH model described in Equations (3) and (4): (3) (4) where Rt represents the implied return (return) of the S&P/ASX 200 Index (ASX SPI200 futures contract) using ten minute intervals from t-10 to t, Rt-1 represents the ten-minute lagged implied return (return), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release and dt is a vector of dummy variables that take the value of one in each ten minute interval t (from t-10 to t+60), or zero otherwise. After confirmation of the presence of an ARCH effect in the returns of the ASX SPI200 futures contract and the implied returns of the S&P/ASX 200 Index, the appropriate model was selected after comparing the Akaike information criterion (AIC), Schwarz information criterion (SIC) and log likelihood function which supports the use an EGARCH model with a Student t distribution. Additionally these distributions have no remaining ARCH effects, as confirmed by the ARCH LM test, or serial correlation, as confirmed by both the correlogram of standard residuals and the correlogram of standard residuals squared.
38
ACCEPTED MANUSCRIPT
PT
Table 4 Evidence of the exchange rate channel of monetary policy.
Monetary policy announcement α βΔit dMN βΔit×dMN
R
Indicators of a multinational firm
0.1272 0.1245
MA
-0.0314 (-3.42)** -0.0193 (-2.08)*
0.0000 (-0.03) 0.0000 (-0.29) 0.0000 (-0.33)
-0.0443 (-2.16)* -0.1281 (-3.34)** -0.0041 (-0.17)
2
0.0012 0.0000 (-0.09) -0.0001 (-0.61)
-0.0455 (-0.81) -0.1445 (-3.22)**
0.0097 0.0039
TE
D
0.0004 (3.52)** 0.0001 (-0.94)
NU S
0.1233
R
CE P
Foreign Revenue>25% of total revenue
-0.1007 (-21.65)** -0.0850 (-15.33)** -0.0898 (-13.21)**
Explanatory Minutes’ Release α βΔit dMN βΔit×dMN
AC
Foreign Assets>25% of total assets
0.0002 (4.36)** 0.0000 (-0.78) 0.0002 (2.36)*
2
CR I
Panel A – Exchange rate channel
39
CR I
MA
NU S
Explanatory Minutes’ Release Assets Revenue -0.0006 (-2.09)* -0.0001 (-1.08) -0.1310 (-3.42)** -0.0038 (-0.15) 0.0000 (-0.10) -0.0001 (-0.75) -0.0438 (-0.45) -0.1547 (-1.80) 0.0003 (-0.80) -0.0001 (-0.36) 0.0008 (2.19)* 0.0004 (-1.34) 0.0008 (2.19)* 0.0004 (-1.33) 0.0010 (2.18)* 0.0006 (-1.43) 0.0001 (-0.29) -0.0003 (-0.98) 0.0008 (2.21)* 0.0004 (-1.46) 0.0013 (2.19)* 0.0001 (-1.34) 0.0004 (-0.66) 0.0001 (-0.14) 0.0006 (-1.24) 0.0002 (-0.48) -0.0001 (-0.11) -0.0005 (-0.93) 0.0195 (-0.13) 0.0068 (-0.05) -0.0415 (-0.35) -0.0326 (-0.29) 0.1450 (-0.98) 0.1236 (-0.93) 0.0898 (-0.30) 0.3043 (-1.29) 0.0283 (-0.26) -0.0037 (-0.04) 0.0359 (-0.30) -0.0730 (-0.63) -0.0356 (-0.16) 0.1259 (-0.81) -0.3361 (-1.41) -0.5037 (-1.99)* 0.1035 (-0.69) 0.0845 (-0.53) -0.4006 (-1.49) -0.5682 (-2.15)* 0.0156 0.0081
AC
CE P
TE
D
Panel B – Exchange rate channel in S&P/ASX 200 sector indices Monetary policy announcement Assets Revenue α 0.0000 (-0.44) 0.0002 (-1.59) β1Δit -0.0851 (-15.35)** -0.0899 (-13.23)** β2(dMN) 0.0004 (3.61)** 0.0001 (-1.06) β3(Δit×dMN) -0.0279 (-2.06)* -0.0194 (-1.47) β4(denergy) -0.0003 (-1.52) -0.0003 (-1.56) β4(dindustrials) 0.0001 (-0.35) 0.0000 (-0.22) β4(dconsumer discretionary) -0.0001 (-0.50) -0.0001 (-0.84) β4(dconsumer staples) 0.0002 (-0.79) 0.0001 (-0.60) β4(dhealth) -0.0005 (-2.75)** -0.0005 (-2.63)** β4(dfinancials) 0.0002 (-0.89) 0.0001 (-0.56) β4(dAREITs) 0.0003 (-1.22) 0.0003 (-1.20) β4(dinformation technology) -0.0007 (-2.93)** -0.0007 (-2.87)** β4(dtelecommunication) 0.0003 (-1.07) 0.0003 (-1.02) β4(dutilities) -0.0001 (-0.20) -0.0001 (-0.44) β5(Δit×dMN×denergy) 0.0365 (-1.78) 0.0252 (-1.34) β5(Δit×dMN×dindustrials) 0.0138 (-0.67) 0.0060 (-0.32) β5(Δit×dMN×dconsumer discretionary) -0.0151 (-0.61) -0.0044 (-0.18) β5(Δit×dMN×dconsumer staples) 0.0641 (3.76)** 0.0508 (1.97)* β5(Δit×dMN×dhealth) 0.0351 (-1.88) 0.0356 (-1.93)* β5(Δit×dMN×dfinancials) -0.0236 (-0.77) -0.0142 (-0.57) β5(Δit×dMN×dAREITs) -0.0755 (-2.12)* -0.0501 (-1.78) β5(Δit×dMN×dinformation technology) 0.0432 (2.07)* 0.0340 (-1.49) β5(Δit×dMN×dtelecommunication) -0.0115 (-0.31) -0.0131 (-0.35) β5(Δit×dMN×dutilities) -0.1092 (-2.07)* -0.0364 (-0.78) 2 R 0.1369 0.1296
PT
ACCEPTED MANUSCRIPT
40
CR I
D
MA
NU S
Explanatory Minutes’ Release Assets Revenue 0.0003 (-0.91) 0.0004 (-1.15) -0.1317 (-3.46)** -0.0043 (-0.17) 0.0000 (-0.08) -0.0004 (-1.06) -0.1514 (-1.11) -0.0005 (-1.25) -0.0005 (-1.29) -0.0002 (-1.25) -0.0012 (-0.92) -0.1823 (-1.59) 0.1356 (-1.01) 0.0329 (-0.28) 0.9288 (4.30)** 0.3802 (-1.26) 0.0120 0.0050
TE
Panel C - Exchange rate channel based on company size Monetary policy announcement Assets Revenue α 0.0005 (2.10)* 0.0007 (2.57)* β1Δit -0.0851 (-15.36)** -0.0899 (-13.23)** β2(dMN) 0.0004 (3.58)** -0.0005 (-2.01)* β3(Δit×dMN) -0.0969 (-3.35)** -0.0007 (-2.41)* β4(dsize portfolio 2) -0.0005 (-1.97)* 0.0001 (-1.04) β4(dsize portfolio 3) -0.0006 (-2.32)* -0.0843 (-3.05)** β5(Δit×dMN×dsize portfolio 2) 0.0721 (2.44)* 0.0709 (2.57)* β5(Δit×dMN×dsize portfolio 3) 0.0868 (2.77)** 0.0851 (2.92)** 2 R 0.1311 0.1288
PT
ACCEPTED MANUSCRIPT
Note: *, ** denote significance at 5% and 1% respectively. T-statistics are in parentheses.
CE P
Results reported in Panel A are the coefficients derived from the OLS model described in Equation (5): (5)
AC
where Ri,t represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release and the dummy variable dMN is equal to one for multinational firms, determined by the proportion of foreign-held assets and foreign-generated revenue, or zero otherwise. Results reported in Panel B and C are the coefficients derived from the OLS model described in Equations (6) and (7) respectively: (6) (7) where dsector is a vector of dummy variables set equal to one for each S&P/ASX 200 sector or zero otherwise, and dsize is a vector of dummy variables set equal to one for each size portfolio or zero otherwise.
41
ACCEPTED MANUSCRIPT
CR I
PT
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
NU S
Table 5 Evidence of industry cyclicality and the interest rate channel of monetary policy.
AC
CE P
TE
D
MA
Panel A - Impact of unexpected monetary policy announcements and explanatory minutes’ releases on the S&P/ASX 200 sector indices Monetary Policy Explanatory Minutes’ Announcement Release 2 R S&P/ASX 200 sector indicies α α βit βit Energy -0.0001 -0.0393** 0.0844 -0.0002 -0.1636* Materials -0.0003 -0.0543* 0.1409 -0.0002 -0.1847* Industrials 0.0000 -0.0517* 0.1646 0.0001 -0.1544 Consumer Discretionary 0.0001 -0.0874** 0.3461 -0.0001 -0.1490 Consumer Staples 0.0000 -0.0587** 0.2888 0.0000 -0.1131 Health -0.0003 -0.0328* 0.0656 -0.0001 -0.1314* Financials -0.0001 -0.0832** 0.2227 0.0001 -0.2902* Information Technology -0.0002 -0.0801** 0.1317 -0.0002 -0.5086** Telecommunications 0.0004 -0.0543** 0.1066 -0.0003 -0.1496 Utilities 0.0002 -0.0384* 0.1009 -0.0003 -0.1778 A-REITs 0.0001 -0.0642* 0.1098 -0.0001 -0.2403* Financials excluding A-REITs -0.0001 -0.0870** 0.2289 0.0002 -0.3015* Panel B - Impact of Australian gross national income (GNI) on the S&P/ASX 200 sector indices α S&P/ASX 200 sector indicies βiGNIt Energy 0.0317 0.2259 0.0003 Materials 0.0383 -1.5232 0.0114 Industrials 0.0337 -2.4379 0.0299 Consumer Discretionary 0.0519* -4.7784* 0.1332 Consumer Staples 0.0426** -1.9816 0.0592 Health 0.0528** -1.4574 0.0311 Financials 0.0525* -3.8836 0.1023 Information Technology 0.0652* -3.2078 0.0612 Telecommunications 0.0158 -0.8819 0.0080
2
R 0.0517 0.0897 0.0563 0.0760 0.0392 0.0457 0.0912 0.2245 0.0377 0.0674 0.0938 0.0835
42
ACCEPTED MANUSCRIPT
-0.4179 -1.3977* -4.3350*
0.0026 0.0109 0.1241
PT
0.0155 0.0121 0.0607
Panel C - Industry cyclicality
MA
NU S
Monetary Policy Announcement Spearman's rank correlation (r) 0.78 Wilcoxon signed rank test (z score) -0.94 Note: *, ** denote significance at 5% and 1% respectively.
CR I
Utilities A-REITs Financials excluding A-REITs
Explanatory Minutes’ Release 0.22 -0.24
Results reported in Panel A are the coefficients derived from the OLS model described in Equation (8):
D
(8)
TE
where Ri,t represents the implied return of the S&P/ASX 200 sector index (i) using ten minute intervals (t0,9 -t10,-1) and it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release.
CE P
The results reported in Panel B are the coefficients derived from the OLS model described in Equation (9): (9)
AC
where Ri,t represents the implied return of the S&P/ASX 200 sector index (i) and GNIt represents the latest percentage change in Australian gross national income (GNI). The sample period covered is from October 2003 to October 2013. Panel C reports the results of a Spearman rank correlation test and Wilcoxon signed rank test. Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
43
ACCEPTED MANUSCRIPT
R2 0.0315 0.0305 0.0335 0.0406 0.0381 0.0316 0.0309 0.0354
Panel B – Impact of explanatory minutes’ releases on financially constrained portfolios formed using the constituents of the S&P/ASX 200 Index α β1Δit β2(dFC) β3(Δit×dFC) -0.0001 -0.1611** Book to Market -0.0001* -0.1623** 0.0002 -0.0392 Debt to Equity -0.0001 -0.1807** 0.0002 -0.0259 Dividend Yield -0.0001 -0.1718** 0.0002 0.0143 Interest Coverage 0.0000 -0.1527** 0.0001 -0.1072 Liability/Assets -0.0001* -0.1506** 0.0002 -0.0631 Size -0.0001 -0.1845** 0.0001 0.0650 Short-term debt/Total debt 0.0000 -0.1982** 0.0001 0.0448
R 0.0073 0.0089 0.0101 0.0106 0.0111 0.0082 0.0084 0.0103
MA NU
SC
RI P
T
Table 6 Evidence of the balance sheet channel of monetary policy. Panel A – Impact of monetary policy announcements on financially constrained portfolios formed using the constituents of the S&P/ASX 200 Index α β1Δit β2(dFC) β3(Δit×dFC) -0.0000 -0.0539** Book to Market -0.0001 -0.0500** 0.0002 -0.0103 Debt to Equity 0.0000 -0.0584** 0.0000 0.0103 Dividend Yield 0.0000 -0.0554** 0.0002 -0.0090 Interest Coverage 0.0000 -0.0556** 0.0001 -0.0090 Liability/Assets 0.0000 -0.0548** -0.0001 0.0037 Size -0.0001 -0.0569** 0.0001 0.0168* Short-term debt/Total debt 0.0000 -0.0552** 0.0001 -0.0055
ED
2
AC
CE
PT
Panel C – Impact of monetary policy announcements on financially constrained constituents of the S&P/ASX 200 Index 2 α β1Δit β2FCv,i β3Δit×FCv,i R -0.0000 -0.0539** 0.0315 Book to Market -0.0002 -0.0285** 0.0003 -0.0325** 0.0380 Debt to Equity -0.0000 -0.0561** 0.0000** 0.0000 0.0335 Dividend Yield -0.0006** -0.0176* 0.0001** -0.0077** 0.0591 Interest Coverage 0.0000 -0.0584** 0.0000 0.0000* 0.0385 Liability/Assets -0.0001 -0.0361** 0.0001 -0.0382** 0.0324 Size -0.0000 -0.0522** 0.0000* 0.0000 0.0303 Short-term debt/Total debt -0.0000 -0.0567** 0.0000 0.0000 0.0353 Panel D – Impact of explanatory minutes’ releases on financially constrained constituents of the S&P/ASX 200 Index 2 α β1Δit β2FCv,i β3Δit×FCv,i R -0.0001 -0.1611** 0.0073 Book to Market -0.0003** -0.1992** 0.0003* 0.0238 0.0140 Debt to Equity -0.0000 -0.1526** 0.0000 -0.0004 0.0108 Dividend Yield -0.0003* -0.1924** 0.0001* 0.0016 0.0163 Interest Coverage -0.0000 -0.1833** 0.0000 0.0000** 0.0115 Liability/Assets -0.0002* -0.0826 0.0004 -0.1662 0.0085 Size -0.0001 -0.1647** 0.0000 0.0000 0.0081 Short-term debt/Total debt -0.0000 -0.1882** 0.0000* 0.0001 0.0104 Note: *, ** denote significance at 5% and 1% respectively.
44
ACCEPTED MANUSCRIPT Results reported in Panels A and B are the coefficients derived from the OLS model described in Equation (10): (10)
RI P
T
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release and the dummy variable dFC is set equal to one for firms that have been identified as financially constrained, based on their book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size or short-term to total debt, and zero otherwise.
SC
Results reported in Panels C and D are the coefficients derived from the OLS model described in Equation (11): (11)
MA NU
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement and separately the explanatory minutes’ release and the variable FCv,i is a vector of continuous variables used to proxy for financial constraint based on company i’s book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size or short-term to total debt.
AC
CE
PT
ED
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
45
ACCEPTED MANUSCRIPT
AC
CE
PT
ED
MA NU
SC
RI P
T
Table 7 Evidence of the bank loan and balance sheet channel of monetary policy - The impact of unexpected monetary policy announcements during economic cycles and on financially constrained portfolios formed using the constituents of the S&P/ASX 200 Index. Panel A - Impact of monetary policy announcements on financially constrained portfolios during the GFC 2 β3(Δit β4(dFC β5(Δit×d β6(Δit×dFC× R α β1Δit β2(dEC) ×dEC) ) dEC) FC) GFC period endogeneously determined 0.031 0.0539* 5 0.0000 * 0.070 0.0399* 0.0019 0.2400* 3 -0.0001 * ** * 0.068 Book to Market 0.0372* 0.0019 0.2284* 0.000 2 -0.0002 * ** * 2 -0.0074 -0.0366 0.070 Debt to Equity) 0.0446* 0.0018 0.2316* 0.000 2 -0.0001 * ** * 0 0.0101 0.0035 0.081 Dividend Yield 0.0423* 0.0018 0.2191* 0.000 0 -0.0002 * ** * 2 -0.0081 -0.0100 0.081 Interest Coverage 0.0423* 0.0019 0.2252* 0.000 7 -0.0002 * ** * 2 -0.0038 -0.0648 0.070 Liability/Assets 0.0415* 0.0019 0.2326* 0.000 4 -0.0001 * ** * 1 0.0062 -0.0320 0.068 Size 0.0436* 0.0019 0.2326* 0.000 8 -0.0002 * ** * 1 0.0183* -0.0200 0.074 Short-term debt/Total 0.0407* 0.0018 0.2385* 0.000 0 debt -0.0001 * ** * 1 -0.0068 0.0165 GFC period exogeneously determined 0.0539* 0.0000 * 0.0399* 0.0001* * Book to Market 0.0001* 0.0371* * * Debt to Equity 0.0445* -0.0001 * Dividend Yield 0.0422* 0.0001* * Interest Coverage 0.0424* 0.0001* * Liability/Assets -0.0001 -
0.031 5
0.0035 ** 0.0035 ** 0.0036 ** 0.0035 ** 0.0035 ** 0.0035
0.3215* * 0.3103* * 0.3168* * 0.3034* * 0.3074* * -
0.082 0
0.000 2 0.000 0 0.000 2 0.000 2 -
0.080 1 -0.0073
-0.0372 0.083 3
0.0099
0.0054 0.096 3
-0.0082
-0.0092 0.095 3
-0.0034 0.0061
-0.0688 -0.0297
0.081
46
ACCEPTED MANUSCRIPT
-0.0001
0.0035 ** 0.0034 **
0.3132* * 0.3134* * 0.3164* *
0.000 1 0.000 1 0.000 1
6 0.080 5 0.0186*
-0.0067
-0.0233 0.085 4 0.0153
MA NU
SC
RI P
Short-term debt/Total debt
**
T
0.0001* *
Size
0.0414* * 0.0436* * 0.0407* *
AC
CE
PT
ED
Panel B - Impact of monetary policy announcements on financially constrained portfolios during a contractionary business cycle phase as determined by the OECD Australian leading index β3(Δit β5(Δit×d β6(Δit×dFC× α β1Δit β2(dEC) β4(dFC) ×dEC) dEC) FC) 0.0539* 0.0000 * 0.0003* 0.0328* 0.0006* 0.0775* * * * * Book to Market 0.0003* 0.0306* 0.0006* 0.0721* * * * * 0.0002 -0.0033 -0.0236 Debt to Equity 0.0002* 0.0359* 0.0006* 0.0825* * * * * 0.0000 0.0037 0.0225 Dividend Yield 0.0002* 0.0339* 0.0006* 0.0759* * * * * 0.0002 -0.0043 -0.0153 Interest Coverage 0.0003* 0.0349* 0.0006* 0.0755* * * * * 0.0001 -0.0035 -0.0183 Liability/Assets 0.0002* 0.0338* 0.0006* 0.0770* * * * * -0.0001 0.0043 -0.0019 Size 0.0003* 0.0355* 0.0006* 0.0788* * * * * 0.0001 0.0164* 0.0013 Short-term 0.0002* 0.0345* 0.0006* 0.0760* debt/Total debt * * * * 0.0001 -0.0016 -0.0129 Panel C - Impact of monetary policy announcements on financially constrained portfolios during a contractionary monetary policy regime β3(Δit β5(Δit×d β6(Δit×dFC× α β1Δit β2(dEC) β4(dFC) ×dEC) dEC) FC) 0.0539* 0.0000 * 0.0004* 0.0001 -
R
2
0.03 15 0.04 64 0.04 57 0.04 83 0.05 81 0.05 51 0.04 64 0.04 61 0.05 10
R
2
0.03 15 0.04
47
ACCEPTED MANUSCRIPT *
34 0.04 23
MA NU
0.0103 0.04 40
T
-0.0148
0.0054
RI P
0.0001
-0.0149
0.0133
0.0001
-0.0031
0.0000
0.0001
SC
0.0153* 0.0905* * * Book to Market 0.0004* 0.0104* 0.0922* * * 0.0001 * Debt to Equity 0.0005* 0.0210* 0.0860* * * 0.0000 * Dividend Yield 0.0005* 0.0174* 0.0869* * * 0.0000 * Interest Coverage 0.0004* 0.0201* 0.0869* * * 0.0001 * Liability/Assets 0.0005* 0.0161* 0.0907* * * 0.0001 * Size 0.0004* 0.0174* 0.0925* * * 0.0001 * Short-term 0.0004* 0.0179* 0.0860* debt/Total debt * * 0.0000 * Note: *, ** denote significance at 5% and 1% respectively.
-0.0001
0.0080
-0.0077
0.05 22 0.04 97 0.04 34
0.0021
0.0035 0.04 29
0.0001
0.0132
0.0081 0.04 68
0.0001
-0.0036
-0.0044
ED
Results reported in Panels A, B, and C are the coefficients derived from the OLS model described in Equation (12):
PT
(12)
AC
CE
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement, the dummy variable dFC is set equal to one for firms that have been identified as financially constrained based on their book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size, or short-term to total debt, and zero otherwise and the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and is set to zero otherwise. Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot. Table 8 Evidence of the bank loan and balance sheet channel of monetary policy - The impact of unexpected monetary policy announcements during economic cycles and on financially constrained constituents of the S&P/ASX 200 Index. Panel A - Impact of monetary policy announcements on financially constrained constituents during the GFC 2 β3(Δit β5(Δit×F β6(Δit×FC R α β1Δit β2(dEC) ×dEC) β4(FCv,i) Cv,i) v,i× dEC) GFC period endogeneously determined 0.0315 0.0539* -0.0000 * 0.0019* 0.0703 0.0001* 0.0399* * 0.2400*
48
ACCEPTED MANUSCRIPT
Interest Coverage
Liability/Assets
Size Short-term debt/Total debt
-0.0001 0.0001* * 0.0001* *
0.0019* * 0.0019* * 0.0019* * 0.0018* *
PT
CE
AC
0.0035* * 0.0034* * 0.0035* * 0.0032* * 0.0035* * 0.0035* * 0.0035* * 0.0034* *
0.0004*
0.3215* * 0.2886* * 0.3197* * 0.2819* * 0.3267* * 0.2827* * 0.3159* * 0.3147* *
-0.0093
-0.0241 0.0703
0.0000 0.0001* *
0.0000 0.0040* *
T
0.0016* *
ED
GFC period exogeneously determined 0.0539* -0.0000 * 0.0399* -0.0001* * 0.0004* 0.0326* Book to Market * * 0.0438* Debt to Equity -0.0001 * 0.0006* 0.0258* Dividend Yield * * 0.0437* Interest Coverage -0.0001 * 0.0342* Liability/Assets -0.0001 * 0.0382* Size -0.0001 * Short-term 0.0424* debt/Total debt -0.0001 *
0.0018* *
0.0729
RI P
Dividend Yield
-0.0001* 0.0007* * 0.0001* *
0.0018* *
* 0.2058* * 0.2371* * 0.1981* * 0.2433* * 0.2054* * 0.2346* * 0.2368* *
0.0000
SC
Debt to Equity
* 0.0328* * 0.0436* * 0.0254* * 0.0438* * 0.0342* * 0.0382* * 0.0424* *
MA NU
Book to Market
* 0.0005* *
0.0000
0.0000* *
0.0000*
0.0001 0.0917 -0.0015 0.0814 0.0001 0.0705
-0.0126
-0.0623 0.0684
0.0000
0.0000 0.0741
0.0000
0.0000
0.0002
0.0315
0.0820
0.0838 0.0004*
-0.0094
-0.0207 0.0834
0.0000* 0.0001* *
0.0000 0.0038* *
0.0000 0.1049 -0.0010 0.0950
0.0000
0.0000*
0.0001 0.0818
0.0000
-0.0125
-0.0672 0.0801
0.0000*
0.0000
-0.0000 0.0855
0.0000
0.0000
0.0002
Panel B - Impact of monetary policy announcements on financially constrained constituents during a contractionary business cycle phase as determined by the OECD Australian leading index
49
ACCEPTED MANUSCRIPT β3(Δit ×dEC)
β6(Δit×FCv,i× dEC)
β1Δit β2(dEC) β4(FCv,i) 0.0539* -0.0000 * 0.0003* 0.0328* 0.0006* 0.0775* * * * * 0.0006* 0.0318* 0.0006* 0.0410* Book to Market * * * * 0.0004* 0.0004 -0.0440** 0.0002* 0.0356* 0.0006* 0.0756* Debt to Equity * * * * 0.0000 0.0000 -0.0000 0.0008* 0.0228* 0.0005* 0.0431* 0.0001* Dividend Yield * * * * * -0.0025 -0.0059* 0.0002* 0.0368* 0.0006* 0.0795* 0.0000* Interest Coverage * * * * 0.0000 * 0.0000 0.0003* 0.0254* 0.0006* 0.0507* Liability/Assets * * * * 0.0002 -0.0159 -0.0547 0.0002* 0.0307* 0.0006* 0.0784* Size * * * * 0.0000* 0.0000 0.0000 Short-term 0.0002* 0.0349* 0.0006* 0.0794* debt/Total debt * * * * 0.0000 0.0000 0.0000 Panel C - Impact of monetary policy announcements on financially constrained constituents during a contractionary monetary policy regime 0.0539* 0.0000 * 0.0004* 0.0153* 0.0905* * * 0.0001 * 0.0537* Book to Market 0.0001 -0.0140 0.0000 * 0.0005* -0.0002 -0.0447* 0.0004* 0.0203* 0.0808* Debt to Equity * * 0.0000 * 0.0000* 0.0000 -0.0001 0.0001* Dividend Yield -0.0003 -0.0130 0.0000 0.0402* * -0.0022 -0.0066 0.0004* 0.0226* 0.0875* Interest Coverage * * 0.0001 * 0.0000 0.0000 0.0000 0.0618* Liability/Assets 0.0003 -0.0120 0.0001 * 0.0004 -0.0084 -0.0582 0.0005* 0.0907* Size * 0.0133* 0.0001 * 0.0000* 0.0000 0.0000 Short-term 0.0005* 0.0184* 0.0883* debt/Total debt * * 0.0000 * 0.0000* 0.0000 0.0001**
AC
CE
PT
ED
MA NU
SC
RI P
T
α
β5(Δit×F Cv,i)
R
2
0.03 15 0.04 64 0.05 46 0.04 80 0.07 54 0.05 57 0.04 74 0.04 55 0.05 09
0.03 15 0.04 34 0.05 05 0.04 40 0.06 93 0.05 00 0.04 43 0.04 23 0.04 69
50
ACCEPTED MANUSCRIPT Note: *, ** denote significance at 5% and 1% respectively. Results reported in Panels A, B and C are the coefficients derived from the OLS model described in Equation (13): (13)
SC
RI P
T
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the monetary policy announcement, the variable FCv,i is a vector of continuous variables used to proxy for financial constraint based on company i’s book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size, or short-term to total debt and the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and is set to zero otherwise.
AC
CE
PT
ED
MA NU
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
51
ACCEPTED MANUSCRIPT
AC
CE
PT
ED
MA NU
SC
RI P
T
Table 9 Evidence of the bank loan and balance sheet channel of monetary policy - The impact of unexpected explanatory minutes’ releases during economic cycles and on financially constrained portfolios formed using the constituents of the S&P/ASX 200 Index. Panel A - Impact of explanatory minutes’ releases on financially constrained portfolios during the GFC 2 β3(Δit β5(Δit×d β6(ΔitxdFC R α β1Δit β2(dEC) β4(dFC) ×dEC) x dEC) FC) GFC period endogeneously determined 0.0073 0.1611 0.0001 ** 0.0101 0.0989 0.0005 0.1880 0.0001 ** ** ** 0.0117 Book to Market 0.0945 0.0005 0.2037 0.000 0.0002 ** ** ** 2 -0.0676 0.0697 0.0130 Debt to Equity 0.1272 0.0005 0.1685 0.000 0.0001 ** ** ** 2 -0.0013 -0.0589 0.0117 Dividend Yield 0.1480 0.0003 0.000 0.0001 ** ** -0.0781 2 0.0289 -0.0342 0.0149 Interest Coverage 0.1246 0.0004 0.000 0.0001 ** ** -0.0997 1 0.0113 -0.2753 0.0115 Liability/Assets 0.1010 0.0005 0.1591 0.000 0.0002 ** ** * 2 0.0045 -0.1673 0.0114 Size 0.1132 0.0005 0.2121 0.000 0.0001 ** ** ** 1 0.0364 0.0697 0.0139 Short-term debt/Total 0.1155 0.0005 0.2393 0.000 debt 0.0001 ** ** ** 1 -0.0129 0.1384 GFC period exogeneously determined 0.1611 0.0001 ** 0.0001 0.1220 ** ** Book to Market 0.0002 0.1210 ** ** Debt to Equity 0.0001 0.1450 * ** Dividend Yield 0.0001 0.1725 * ** Interest Coverage 0.0001 0.1506 * ** Liability/Assets -
0.0073
0.0008 ** 0.0008 ** 0.0010 **
0.1838 ** 0.1865 ** 0.1928 **
0.0099
0.0113 0.000 2
-0.0511
0.0304 0.0136
0.000 2
-0.0153
-0.0261 0.0121
0.0006 **
-0.0640
0.000 2
-0.0940 -
0.000 2 0.000
0.0253
-0.0272 0.0156
0.0009 ** 0.0008
0.0218 -0.0260
-0.3158 -0.0966
0.0110
52
ACCEPTED MANUSCRIPT
Size
0.0001
**
0.0008 ** 0.0009 **
0.1740 * 0.1849 ** 0.2300 **
2 0.0108 0.000 1
0.0668
-0.0052 0.0137
0.000 1
0.0014
0.1094
RI P
Short-term debt/Total debt
0.1163 ** 0.1436 ** 0.1436 **
T
0.0002 ** 0.0001 **
AC
CE
PT
ED
MA NU
SC
Panel B - Impact of explanatory minutes’ releases on financially constrained portfolios during a contractionary business cycle phase as determined by the OECD Australian leading index β3(Δit β5(Δit×d β6(ΔitxdFC α β1Δit β2(dEC) β4(dFC) ×dEC) x dEC) FC) 0.1611 0.0001 ** 0.2342 0.0000 0.0273 0.0001 ** Book to Market 0.2391 0.000 0.0001 0.0268 0.0001 ** 2 -0.0557 0.0278 Debt to Equity 0.0759 0.1844 0.000 0.0001 ** 0.0001 ** 2 0.0577 -0.1418 Dividend Yield 0.1055 0.1167 0.000 0.0001 ** 0.0001 ** 2 0.0795 -0.1081 Interest Coverage 0.0766 0.1312 0.000 0.0000 ** 0.0001 ** 2 0.0627 -0.2806 Liability/Assets 0.1895 0.000 0.0001 0.0438 0.0001 ** 2* 0.0650 -0.2197 Size 0.2409 0.000 0.0001 0.0482 0.0001 ** 1 0.0708 -0.0103 Short-term debt/Total 0.2796 0.000 debt 0.0000 0.0380 0.0001 ** 1 -0.0279 0.1223 Panel C - Impact of explanatory minutes’ releases on financially constrained portfolios during a contractionary monetary policy regime 0.1611 0.0001 ** 0.0001 0.0755 0.0001 -0.1236 Book to Market 0.1796 0.000 0.0001 0.0535 0.0000 ** 0 -0.1703 0.2185 Debt to Equity 0.1132 0.000 0.0000 ** 0.0000 -0.1154 2 -0.0004 -0.0424
R
2
0.0073
0.0109
0.0125
0.0136
0.0126
0.0152
0.0126
0.0123
0.0146
0.0073
0.0080 0.0098
0.0107
53
ACCEPTED MANUSCRIPT
Interest Coverage 0.0000 Liability/Assets 0.0000
0.0109 0.0002
-0.0328
0.000 1
-0.0322
0.000 4*
-0.0978 0.1832 **
0.000 3* 0.000 1
-0.0550
0.1125 0.0127
0.0001
0.0000
0.0001 0.0706 0.0000 Short-term debt/Total 0.1040 debt 0.0001 * 0.0000 -0.1598 Note: *, ** denote significance at 5% and 1% respectively.
SC
Size
0.1043
0.0375
-0.0504
0.0303
0.0091
-0.1676 0.0093 0.1920 0.0112 0.0238
MA NU
0.000 1
-0.3436
T
0.0000
0.1304 ** 0.1264 ** 0.0860 *
RI P
Dividend Yield
Results reported in Panels A, B, and C are the coefficients derived from the OLS model described in Equation (12): (12)
PT
ED
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the explanatory minutes’ release, the dummy variable dFC is equal to one for firms that have been identified as financially constrained based on their book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size, or short-term to total debt, and zero otherwise and the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and is set to zero otherwise.
AC
CE
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
54
ACCEPTED MANUSCRIPT
CE
PT
ED
MA NU
SC
RI P
T
Table 10 Evidence of the bank loan and balance sheet channels of monetary policy - The impact of unexpected explanatory minutes’ releases on financially constrained constituents of the S&P/ASX 200 Index. Panel A - Impact of explanatory minutes’ releases on financially constrained constituents during the GFC 2 β3(Δit β5(Δit×F β6(Δit×FCv,i R α β1Δit β2(dEC) ×dEC) β4(FCv,i) Cv,i) × dEC) GFC period endogeneously determined 0.00 0.1611* 73 -0.0001 * 0.00 0.1241* 84 0.0001* * 0.0003 0.1289* 0.01 0.3082* 80 Book to Market -0.0002 -0.0750 0.0003 * 0.0002 -0.0735 0.1630 0.01 0.1471* 23 Debt to Equity -0.0001 * 0.0003 -0.0509 0.0000 -0.0001 -0.0007 0.02 0.2965* 11 Dividend Yield -0.0002 -0.0161 0.0001 * 0.0000 -0.0256 0.0345* 0.01 0.1524* 0.0000* 31 Interest Coverage -0.0000 * 0.0003 -0.1245 0.0000 * 0.0006* 0.00 0.0003* 98 Liability/Assets * -0.0916 0.0003 -0.0313 0.0005* -0.0657 -0.2007 0.00 0.1251* 94 Size -0.0001 * 0.0003* 0.1393* 0.0000 0.0000 0.0000 0.01 Short-term 0.1432* 31 debt/Total debt -0.0000 * 0.0004* 0.1619* 0.0000 -0.0000 0.0008**
AC
GFC period exogeneously determined 0.1611* -0.0001 * 0.0001* 0.1220* * * 0.0003* Book to Market * 0.0859* 0.1338* Debt to Equity -0.0001 * Dividend Yield
-0.0003
Interest Coverage
-0.0001 0.0003* *
Liability/Assets
-0.0603 0.1502* *
-0.0784
0.00 73
0.0008* * 0.0006* * 0.0010* * 0.0005* 0.0009* * 0.0008* *
0.1838* * 0.2828* * 0.1504* 0.2571* 0.1819* *
0.00 99 0.01 69 0.0003*
-0.0671
0.1147 0.01 43
0.0000
-0.0002
-0.0004
0.0000
-0.0196
0.0257
0.0000
0.0000* *
0.0003
0.01 93 0.01 48 0.01 11
-0.1286
0.0004
-0.0907
-0.1162
55
ACCEPTED MANUSCRIPT 0.0001*
Size
-0.0001
0.0008* * 0.0009* *
0.1911* * 0.2117* *
0.01 06 0.0000
-0.0000
0.0000 0.01 44
0.0000
0.0000
0.0007*
AC
CE
PT
ED
MA NU
SC
RI P
T
Short-term debt/Total debt
0.1209* * 0.1428* *
56
ACCEPTED MANUSCRIPT
AC
CE
PT
ED
MA NU
SC
RI P
T
Panel B - Impact of explanatory minutes’ releases on financially constrained constituents during a contractionary business cycle phase as determined by the OECD Australian leading index β3(Δit β5(Δit×F β6(Δit×FCv,i α β1Δit β2(dEC) ×dEC) β4(FCv,i) Cv,i) × dEC) 0.1611* -0.0001 * 0.2342* 0.0000 -0.0273 0.0001 * 0.3055* Book to Market 0.0003* -0.0160 0.0001 * 0.0003* -0.0356 0.0752 0.0706* 0.1365* Debt to Equity 0.0000 * 0.0001 * 0.0000* 0.0001 -0.0009* Dividend Yield -0.0003 0.0826* 0.0000 0.1954* 0.0000 -0.0002 0.0037 0.1967* 0.0000* Interest Coverage 0.0000 0.0672* 0.0001 * 0.0000 * 0.0000 0.0003* 0.0006* Liability/Assets * -0.0943 0.0001 -0.0068 * 0.1429 -0.4681 0.2450* Size 0.0000 -0.0249 0.0001 * 0.0000 0.0000 0.0000 Short-term 0.2498* debt/Total debt 0.0000 -0.0460 0.0001 * 0.0000* 0.0001 0.0000 Panel C - Impact of explanatory minutes’ releases on financially constrained constituents during a contractionary monetary policy regime 0.1611* -0.0001 * 0.0001
-0.0755
-0.0001
Book to Market
-0.0000
0.0001
Debt to Equity
0.0001
-0.0344 0.0854*
Dividend Yield
0.0000
Interest Coverage
0.0001
0.0652 0.1082*
Liability/Assets
-0.0003
-0.1124
-0.1236 0.2881*
0.0001
-0.0744
0.1525
0.0000
-0.0001
-0.1114
0.0000
-0.0003 0.0361* 0.0000* *
-0.0002
0.0000
-0.1076 0.3438*
-0.0001
0.0722
0.0008*
0.0764
-0.4113
0.0000
0.0000
0.0000
0.0000
0.0002
-0.0001
0.0000
Size 0.0001 -0.0784 0.0000 -0.1395 Short-term debt/Total debt 0.0001 0.0979* 0.0000 0.1540* Note: *, ** denote significance at 5% and 1% respectively.
0.0000
0.0465* 0.0000
R
2
0.00 73 0.01 09 0.01 83 0.01 48 0.01 87 0.01 44 0.01 30 0.01 21 0.01 46
0.00 73 0.00 80 0.01 61 0.01 14 0.02 10 0.01 21 0.00 97 0.00 88 0.01 13
Results reported in Panels A, B and C are the coefficients derived from the OLS model described in Equation (13):
57
ACCEPTED MANUSCRIPT (13)
RI P
T
where Rit represents the return on firm i shares using ten minute intervals (t0,9 - t-10,-1), it represents the unexpected component of the explanatory minutes’ release, the variable FCv,i is a vector of continuous variables used to proxy for financial constraint based on company i’s book to market ratio, debt to equity ratio, dividend yield, interest coverage, liability to assets ratio, size, or short-term to total debt and the dummy variable dEC is set to one if the release occurs during the Global Financial Crisis, in a contractionary phase of the business cycle, or during a contractionary monetary policy regime, and is set to zero otherwise.
AC
CE
PT
ED
MA NU
SC
Model appropriateness is confirmed by the significance of the F-statistic in all regression models. Further, a Huber-White adjustment is applied to control for heteroskedasticity, Variance Inflation Factors reveal variables are not multicollinear and outliers are trimmed from the data by excluding any observation related to a change in the 30-day cash rate futures contract greater than three standard deviations from the mean. This has also been confirmed visually using a scatterplot.
58
ACCEPTED MANUSCRIPT
The Channels of Monetary Policy Triggered by Central Bank Actions
T
and Statements in the Australian Equity Market
RI P
Highlights
RBA actions and statements have a comparable impact on the Australian equity
SC
market
Evidence of all channels of monetary policy following actions and statements
Exposes a comparable avenue to affect monetary policy
Provides an explication of the impact of monetary policy in the equity market
AC
CE
PT
ED
MA NU
59