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This study analyzes the sensitivity of a series of Indian stock indices for the astonishing component of monetary and macroeconomic policy with the data set from 1st April 2004 to 31st July 2016. The immediate impact is assessed with Event Analysis, and the dynamic effect is analyzed with VAR model. The result of the event analysis indicates that the monetary policy surprise significantly affects the stock market and is more prominent than that of other macroeconomic surprises. Unlike the event study, the VAR analysis found that the other macroeconomic surprise also affects stock return. The study also highlights the industry effect and size effect, which is coherent with the predictions of the CAPM model. While many studies have been conducted on the monetary policy surprise in the developed economy, there are relatively few studies on macroeconomic surprises. Some of the studies conducted in India have analyzed the impact of monetary policy surprises on stock price; however, to the best of our knowledge, none of the studies has examined the simultaneous effect of both macroeconomic and monetary policy surprise. The study is relevant because the responses differ across sectors and vary with firm sizes. Thus, the study can effectively be used as a hedging instrument. Furthermore, the stock market acts as a vital channel for policy transmission and a critical decision driver for corporate finance. The understanding of firm and stock market dynamics against macroeconomic surprises can help policy makers in enhancing policy effectiveness and corporate finance professionals in improving decision making.
Pal et al. (Tue,) studied this question.