Monetary policy and the profitability incidencia en stock market

part II

Abstract

The present literature review is aimed at continuing the discussion on the incidence of monetary policy in stock market returns, focusing this time in the central banks´ decisions consistent of modifying or maintaining without change the target call rate, in the framework of a target inflation policy. Also, we intend to give the first step for studying the Peruvian case by means of an econometric model proposal. Taking into account the unpredictable market reactions, most the international studies have had to introduce the Efficient Market Hypothesis (EMH) in order to explain the reason for which the market sometimes does not respond conversely to an increase or decrease in the interest rates, according to the economic theory. For that reason, as a first objective, we intend to explore several studies which used different methodologies to explain the relationship between interest rates and stock market returns. Second, we found out on the monetary policy transmission mechanism in orderto find therelationship between our variables. Third, we formulate an econometric model which could be useful to demonstrate if there is or not causal relationship between monetary policy and the returns of Peruvian stock market. At the end of the study, we adapted the technique of Kuttner (2001) to the Peruvian case, in order to separate the information into two components: expected and unexpected; we assume that event study's methodology should be used, and it should be worked in the Efficient Market Hypothesis framework.