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We examine the effect of monetary policy announcements in Thailand, which is one of emerging market countries in Asia, on stock prices at the firm level. We find that the expected change, rather than the unexpected change, in interest rates affects stock prices. The stock price response to the interest rate announcement is asymmetric. For instance, the relation between interest rate surprises and stock prices is conditional on the direction of the interest rate change. In general, macroeconomic conditions and firm characteristics cannot explain the stock price reaction to the announcement. In addition, stock prices of firms in different industries appear to react heterogeneously to the interest rate announcement.

As empirical evidence on the effect of monetary policy on asset prices in developing countries remains limited2, there is seemingly a challenge for policy makers and investors to understand how monetary policy decisions in developing countries exert an influence on the economy and financial markets. In addition, as previous studies have generally focused on the effects of monetary policy on stock prices at the aggregate level3, examining such effects at the firm level may yield different results. Following Konrad's (2009) call for new research in developing countries, we examine the effect of monetary policy announcements on stock prices at the firm level in Thailand, which is a small and open developing economy in Asia. Using Thailand as a context provides new insights into the effect of monetary policy on stock prices in an emerging market country that has undertaken major financial and legal reforms following the financial crisis. In particular, the Bank of Thailand has adopted an inflation targeting framework since early 2000s. Given the relative long time-series data availability on the Bank of Thailand's monetary policy announcements (than other developing countries in Asia that have adopted the inflation targeting regime), Thailand becomes an appropriate choice for this type of studies in the context of emerging market countries in Asia. Our findings could be used as a basis for better understanding of the stock price reaction to the monetary policy announcement in other developing countries such as Indonesia. Several papers have examined the impact of monetary policy surprises on stock prices, notably, Bernanke and Kuttner (2005), Bredin et al. (2007), Farka (2009), and Chuliá et al. (2010). None of these paper addressed the issues examined here, namely, interactions between policy rate changes and macroeconomic conditions or firm-specific characteristics. In terms of empirical prediction, a key feature of our models is the moderating effect of macroeconomic conditions or firm-specific variables on the relation between monetary policy changes and stock prices. None of the above papers directly examines this moderating effect. In this study we use a relatively extensive data set that contains the Bank of Thailand's repurchase rate (hereafter “policy rate”) announcements (i.e. announcements of interest rate targets), which we use as a proxy for monetary policy decisions in Thailand, during the period 2003–2011. Our primary findings show that stock prices react positively to the policy rate announcement. These findings are inconsistent with Vithessonthi and Techarongrojwong (2012), who find that an increase in the policy rate by the Bank of Thailand is negatively associated with stock prices during the 2003–2009 period. This result is also in contrast with empirical findings found in the United States as shown by Bernanke and Kuttner (2005). After having documented abnormal returns around the monetary policy announcements, we address a question of what explains these abnormal returns. We show that the expected change in the policy rate plays an important role in determining the abnormal returns. Depending on specifications, our results suggest that an expected increase in the policy rate of 100 basis points would raise an abnormal return by about 75 basis points. Previous studies, such as Rigobon and Sack (2004), Bernanke and Kuttner (2005), Bredin et al. (2007), Farka (2009), and Chuliá et al. (2010), show that stock prices react negatively to a hike in interest rates. For instance, Bernanke and Kuttner (2005) report that an unexpected cut in the Federal funds rate targets tends to result in an increase in returns on the stock market. In the same vein, Farka (2009) reports that an unexpected increase in the Federal funds targets tends to cause a fall in stock returns. In a recent study, Chuliá et al. (2010) find that at the firm level, the effect of the expected change in monetary policy on stock returns is not significant, while the effect of unexpected change in the policy on stock returns is significant. Inconsistent with prior studies, the unexpected change in the policy rate generally tends to have no effect on abnormal returns in our study. We observe that the coefficient on the interaction term between an unexpected change in the policy rate and a monetary policy easing variable is positive and is significant at the 10% level. In addition, the coefficient on the interaction term involving an unexpected change in the policy rate and a monetary policy tightening dummy variable is positive and is statistically significant at the 10% level. Taken together, these results suggest that in the context of Thailand, the stock price response to a polity rate change is not conditional on the direction of a monetary policy action. Our results provide weak support to the earlier findings of Vithessonthi and Techarongrojwong (2012), reporting that the effect of monetary policy decisions on stock prices in Thailand is asymmetric. Several scholars, such as Bernanke and Kuttner (2005), Basistha and Kurov (2008), Farka (2009), and Chuliá et al. (2010), report that stock prices react asymmetrically to US monetary policy actions. Our findings reveal that macroeconomic conditions and firm characteristics are not associated with abnormal returns. Neither macroeconomic conditions nor firm-level characteristics influence the impact of policy rate surprises on abnormal returns. During weak or poor business conditions, the expected change in the policy rate has a positive effect on abnormal returns. However, during periods of good business conditions, neither the expected change nor the unexpected change in the policy rate affects the abnormal returns. These findings appear to indicate that during normal times, monetary policy decisions do not affect stock prices appears, and that during bad times, the expected change in the policy rate becomes more relevant. Our results show that the stock price reaction to the announcement of monetary policy appears to be heterogeneous across industries. In particular, we find a negative effect of the unexpected change in the policy rate on the abnormal return for the financial industry subsample. In addition, the expected change in the policy rate is positively associated with the abnormal returns in four industry subsamples. This finding is relatively novel because prior studies in Thailand such as Vithessonthi and Techarongrojwong (2012) and in the United States such as Rigobon and Sack (2004), Farka (2009), and Chuliá et al. (2010) do not empirically examine whether the effect of monetary policy on stock prices is sensitive to the industry characteristics. Prior studies that examine the stock return response of industry portfolios to monetary policy such as Bernanke and Kuttner (2005) show that the magnitude of the response to changes in federal fund rates is fairly identical across industries. We find that during the global financial crisis of 2007–2009, macroeconomic conditions have a direct effect on abnormal returns, and that the unexpected change in the policy rate has a positive effect on abnormal returns. During the tranquil period, the expected change and the unexpected change in the policy rate have no effect on abnormal returns. These findings imply that in good times, the effect of the central bank's actions on stock prices at the firm level tends to be limited, in the sense that monetary policy actions may not result in abnormal returns of firms when business conditions are normal or good.

We examine the effect of the Bank of Thailand's policy rate announcements on stock prices at the firm level from January 2003 to December 2011. In a closely related study, Vithessonthi and Techarongrojwong (2012) show that a change in the policy rate made by the Bank of Thailand is negatively related to stock prices during the period 2003–2009. Our study differs from the previous studies such as Rigobon and Sack (2004), Farka (2009), Chuliá et al. (2010), and Vithessonthi and Techarongrojwong (2012) in three important areas. First, because we focus our analysis on the effect of monetary policy actions on stock prices at the firm level, we are able to estimate firms’ abnormal stock return, rather than “raw” stock returns, associated with the monetary policy announcement, thereby providing a relative clearer examination of the impact of monetary policy actions on stock prices. Second, we examine whether the effect of monetary policy announcements on stock prices is contingent upon macroeconomic conditions. Examining the conditions under which the monetary policy announcement affects stock prices at the firm level is important. We show that the effect of both the expected change and the unexpected change in the policy rate on the abnormal return is insignificant in some situations. Third, we examine and show that firms-specific characteristics variables are unable to explain variations in the abnormal return, suggesting that when a monetary policy action matters, it tends to affect all firms indiscriminately. As we show that the policy rate announcement appears to have a significant effect on stock prices, we then take up the question of what can explain the stock price reaction to the policy rate announcement. A key result of our empirical analyses is that the expected change in the policy rate plays an important role in determining abnormal returns. Depending on specifications, we find that an expected increase in the policy rate of 100 basis points would raise an abnormal return by about 75 basis points. Clearly, this finding is different to Vithessonthi and Techarongrojwong (2012) who find that an unexpected repurchase rate change has a negative effect on stock prices. It is important to note that while a direct comparison between their results and ours must be made with caution because our dependent variable is the abnormal return while their dependent variable is the “raw” stock return, there are reasons to believe that our abnormal return variable is a better measure of the stock price reaction to monetary policy actions (relative to the “raw” stock return) based on an idea that an abnormal return of a firm reflects an excess return associated with monetary policy news after controlling for the market return. Taking into account different approach to measuring the stock price reaction to a monetary policy action in prior studies and ours, we argue that a likely explanation that may reconcile these seemingly different results shown in other studies, especially in Vithessonthi and Techarongrojwong (2012), and ours, is that while the Bank of Thailand's expected change in the policy rate appears to have a negative effect on stock prices (i.e. stock returns) as reported in Vithessonthi and Techarongrojwong (2012), we show that after controlling for stock market returns, the expected change in the policy rate has a positive effect on stock prices (i.e. abnormal returns). Inconsistent with expectations, the unexpected change in the policy rate generally does not affect the abnormal return over the whole study period. Our findings reveal that macroeconomic conditions and firm characteristics cannot explain variations in abnormal returns. Neither macroeconomic conditions nor firm characteristics appear to moderate the effect of policy rate surprises on abnormal returns. We show that when business conditions are improving, neither the expected change in the policy rate nor the unexpected change in the policy rate can explain variations in abnormal returns. When business conditions are worsening, the expected change in the policy rate has a positive effect on abnormal returns. These findings suggest that during good times, the impact of monetary policy on stock prices appears to be non-existent, and that during bad times, the expected change in the policy rate matters. During the global financial crisis of 2007–2009, macroeconomic conditions are associated with abnormal returns, and that the unexpected change in the policy rate has a positive effect on the abnormal return. During the tranquil period, neither the expected change nor the unexpected changes in the policy rate is associated with the abnormal return. Overall, one likely explanation for our findings that a policy rate surprise has no effect on abnormal returns, but an expected component of a policy rate change has a positive effect on abnormal returns is that investors appear to know what the Bank of Thailand is likely to do most of the time, but they may not believe that the Bank of Thailand's decisions are appropriate. The findings that neither the expected change in the policy rate nor the surprise element of the policy rate is associated with the abnormal return when business conditions are improving (see Model 2 of Table 8) suggest that in normal times, the Bank of Thailand's monetary policy decisions are neither substantially beneficial nor significantly harmful for most firms, so we do not observe abnormal changes in stock prices at the firm level. During worsening business conditions, the monetary policy actions begin to matter. The positive effect of the expected change in the policy rate on the abnormal return during tough business conditions is a puzzle. It appears to suggest that investors are delighted at a news report that an anticipated hike in the interest rate has been confirmed, and that investors are unhappy at an announcement that an anticipated cut in the interest rate has been confirmed. Both reactions are inconsistent with what has been observed in the developed countries. A critical interpretation of these findings simply suggests that the stock market is not satisfied with the central bank's actions. In this paper, we cannot ascertain whether the stock market is right or wrong with respect to its perception of the central bank's actions. A question of whether the central bank does what it preaches is important for future research. If the central banks indeed fail to keep their words, it would not be unreasonable to observe a different reaction to monetary policy actions than one would expect. Coming back to our initial question: Does monetary policy matter in developing countries in the same way as in developed countries? The results in this study suggest that pattern of the stock price response to the Thai monetary policy announcement is quite distinct from those of the developed countries. Indeed, we find that the pattern of the stock market reaction to the monetary policy announcement is almost in opposite to what has been documented in the US as well as in other advanced countries.