Heterogeneity of Thai stock reaction to U.S. Federal Reserve and European Central Bank monetary policy announcements

Abstract

This paper analyzes the impact of Fed’s and ECB’s monetary policy announcements on Thai stocks. For the Fed’s effect, I find that a 1% unexpected cut of Fed fund rate associates with 4.25% increase in SET index. Further evidence also shows substantial degree of heterogeneity in reaction of stocks in different sector and stocks with different characteristic. The most sensitive sector to Fed’s surprise is the financial sector, followed by industrials, resources, and property and construction. These sectors’ reaction is highly responsive because they are cyclical and capital-intensive sector, in which their product demand and source of fund are interest-sensitive. For the stock characteristic, CAPM beta is a factor of heterogeneity in reaction; the low-beta group is less responsive than the middle-beta group. This finding suggests that U.S. monetary policy is a risk factor in Thai equity market. Furthermore, the reaction of Thai stock market to Fed’s surprise is not asymmetry across different state of U.S. economy. Thai stock reacts to Fed’s surprise only in the period of U.S. recession. For the ECB, I find no significant reaction on SET index, neither on sector level. The only characteristic that seems to affects stock reaction is the export dummy. In comparison to the none-export firms, export firms reacts in more negative way to unexpected increase in ECB’s policy rate. As a decrease in interest rate stimulate world aggregate demand, demand for export also increase.