ABSTRACT

This research investigates the asymmetric effect of monetary policy on stock market volatility, it is a panel analysis of high income countries and low middle income countries over the states of stock market which is bull and Bear. This research used the data over the period of 2010M1 to 2021M12. The objectives of the study are to examine the volatility of stock market, identify bull and bear states of stock market, asymmetric effect of monetary policy on stock market. Volatility of stock market is explored by GARCH (1,1). The outcomes showed that, in both High and low middle income countries volatility is persistent. For the identification stock market periods Markov regime switching model had been employed. It is identified that the high persistence showed by bull and bear states. It is also explored that in most of the countries when countries change its regime to bear it is the shorter period. GMM has been used to explore the asymmetric effect of monetary policy on stock market volatility. Upshots showed that there is asymmetric response of monetary policy to the stock market volatility, to bull and bear states of stock market. It is also identified that the greater impact of monetary policy is in bear state as compare to bull state. When the policy makers formulating policies, they have to look at the condition of the economy. When Central bank implement tightening monetary policy to calm down the economic conditions it may have adverse effect of the financial markets, stock market. In case of expansionary monetary policy, it allows the investors to invest in the economy due to circulation of money and the shares of stock market shift from bear state to bull.