Macroprudential policies and Stock Market

Financial system is a broad concept referring to the marketplace where ​exchange of securities
takes place including the stock market (Will Kenton,2020). The stock market is important to
vibrate, beneficial for financing the private sector and sharing international financial risks
(Khambata, 2000). The stock market is very sensitive so it will respond as soon as national
and international events (both positive or negative) occur (Rafaqet Ali, Munhamad Afzla,
2012). When occurring incidents or events, both inside and outside, it increases the volatility
of the stock market. Since then causing negative effects should its performance and financial
risks (Rafaqet Ali, Munhamad Afzla, 2012).

In term of macroprudential policies, many economists have conducted studies to show its
effects on various aspects of the economy such as credit growth ( E Gómez, ​2017 ; ​Lim et al.,
2011), bank risk ( ​M Olszak, ​2019 ; X Zhang, 2018 ; Y Altunbas, 2018), emerging
economies (​JH Hahm, ​2012; A Coman, ​2019; K Aoki, ​2016)​, monetary policies (​O Loisel,
​2014; LEO Svensson, ​2018), system risk (II Tomuleasa, ​2015) real estate (Labonne, and
Remy Lecat., 2014)… Besides, scholars also show the relationship between financial stability
and macroeconomic policies through articles and research​. Financial stability is defined as a
state of the financial system that is not subject to undesirable effects, resistant to economic
shocks, and operates smoothly (​GJ Schinasi, ​2004)​. The potential for generating systematic
risks comes from shocks and gaps from the financial system, economy and macroeconomic
development (​Jan Frait, Zlatuše, Komárková, 2010)​. The policy of financial stability is
macroprudential oriented. There are two main objectives of macroeconomic policies: to
prevent the occurrence of systematic financial risks and be useful in promoting resilience of
the financial system (B. Gadanecz, K. Jayaram, n.d). ​From the stock market return
perspective, B. Born (​2011) points out that: After examining empirical assessments of market
reactions, the stock market return is significant and potentially long-lasting effect by
Financial Stability Reports (FSRs). According to S. Muñoz, S. Jahjah, M. Cihák (2001) in
​Business & Economics, the role of FSRS is a measure of financial stability and consequently
an effective device for macro policy.
In addition, there are many studies showing the impact of macroeconomic factors on the
stock market. When inflation increases, interest rates will increase accordingly. Stock market
becomes less attractive than other investment channels such as savings deposits … that
causes stock price decreases. The negative impact of inflation on the stock market has been
proved by Fama, Schwert (1977); A. Al Sharkas và M. Al Zoubi (2011);... The level of
interaction between the exchange rate and the stock market is evidenced through the study of
Mahmudul, Salah Uddin (2009); Seri Suriani (2015);... B Malhotra (2014) found the impact
of foreign direct investment on share price. Besides, there are a number of studies showing
the influence of macroeconomic factors on the stock market such as D Pilinkus, 2010; C
Barnor - ​2014; K Celebi, 2019...

It is almost impossible to find research that demonstrates the impact of macroprudential

policies on stock markets on the internet. However, based on previous studies,
macroprudential policies have a positive impact on financial stability, while stock markets are
part of the financial system. In other words, from macroprudential policies with financial
stability and financial stability to stock markets, it can be seen that there is a correlation
between macroprudential policies and stock markets. Especially stock market returns are
proven to be under the influence of FSRS - a device of macro policy. From this we propose
the hypothesis below:

Hypothesis: M​acroprudential policies have a positive impact on the stock market, especially
on stock market returns. .

Reference:

S. Muñoz, S. Jahjah, M. Cihák .(2001). Business & Economics: Financial Stability

Reports:What Are they Good for? Retrieved from:

https://books.google.com.vn/books?id=B4c7EB419f4C&pg=PA4&lpg=PA4&dq=financial+s
tability+reports+(fsrs)+and+macroprudential+policy&source=bl&ots=8LsWUZJVSN&sig=
ACfU3U1Md5MfSMykqp1kHKXgVM4abhw0YA&hl=vi&sa=X&ved=2ahUKEwjsgJnA5rr
qAhU8yosBHfsPA6oQ6AEwAnoECAkQAQ#v=onepage&q=financial%20stability%20repo
rts%20(fsrs)%20and%20macroprudential%20policy&f=false

B Born .(​2011). Macroprudential policy and central bank communication. Retrieved from:

https://ideas.repec.org/h/bis/bisbpc/60-14.html

K. Yilla, N. Liang. (2020). What are macroprudential tools? Retrieved from:

https://www.brookings.edu/blog/up-front/2020/02/11/what-are-macroprudential-tools/?fbclid
=IwAR0oAh4Hsa6AoA3TT0ih1JC_rjAytXY56qZY6G_l0une75r78csQYyQ-lcY

E. Gómez, A. Lizarazo, J. C. Mendoza, A. Murcia, 2017. Evaluating the impact of

macroprudential policies on credit growth in Colombia. Retrieved from:
https://www.bis.org/publ/work634.pdf

Lim, C.H., Columba, F., Costa, A. Kongsamut, P., Otani, A., Saiyid, M., Wezel, T., Wu,X.,
(2011). Macroprudential policy: what instruments and how are they used? Lessons from
country experiences. IMF Working Paper 11/238.

X Zhang, (2018). Macroprudential policy and bank risk. Retrieved from:

https://www.sciencedirect.com/science/article/pii/S0261560617302358

JH Hahm, ​(2012). Macroprudential Policies in Open Emerging Economies. Retrieved from:

https://www.nber.org/papers/w17780

LEO Svensson, ​(2018). Monetary Policy and Macroprudential Policy: Different and
Separate? Retrieved from:
https://www.larseosvensson.se/files/papers/monetary-policy-and-macroprudential-policy-diff
erent-and-separate.pdf
II Tomuleasa, ​(2015). Macroprudential policy and systemic risk: An overview. Retrieved
from:

https://core.ac.uk/download/pdf/82666573.pdf

O Loisel, ​(2014). Discussion of “Monetary and Macroprudential Policy in an Estimated

DSGE Model of the Euro Area”. Retrieved from:

https://www.ijcb.org/journal/ijcb14q2a9.pdf

Y Altunbas, (2018). Macroprudential policy and bank risk. Retrieved from:

​https://www.sciencedirect.com/science/article/pii/S0261560617302358
M Olszak, (2019). Do macroprudential policy instruments reduce the procyclical impact of
capital ratio on bank lending? Cross-country evidence. Retrieved from:
https://www.tandfonline.com/doi/full/10.1080/1406099X.2018.1547565

Y.Jiang, C.Li, J. Zhang and X. Zhou (2019). Financial Stability and Sustainability under the
Coordination of Monetary Policy and Macroprudential Policy: New Evidence from China.
Retrieved from: ​https://www.mdpi.com/2071-1050/11/6/1616/pdf

JH Hahm, ​2012 Financial Stability and Sustainability under the Coordination of Monetary
Policy and Macroprudential Policy: New Evidence from China. Retrieved from:
https://www.nber.org/papers/w17780

A Coman, ​(2019). In the face of spillovers: prudential policies in emerging economies.

Retrieved from:
https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2019/in-the-face-of-spillo
vers-prudential-policies-in-emerging-economies.pdf

K Aoki, ​(2016). Monetary and Financial Policies in Emerging Markets. Retrieved from:
​https://www.bis.org/events/confresearchnetwork1709/benigno.pdf
Khambata, D. (2000) Impact of foreign investment on volatility and growth of emerging
stock market, Multinational Business Review, 8, 50±59.

Rafaqet Ali, Munhamad Afzal, (2012). ​Impact of global financial crisis on stock
markets:Evidence from Pakistan and India. Retrieved from:

https://www.researchgate.net/publication/254413039_Impact_of_global_financial_crisis_on_
stock_markets_Evidence_from_Pakistan_and_India

Wil Kenton, (2020). Financial Market. ​Retrieved from:

https://www.investopedia.com/terms/f/financial-market.asp

McDonald, C (2015): “When is macroprudential policy effective?” BIS Working Papers No.
496, March

B. Gadanecz, K. Jayaram.( n.d), Macroprudential policy frameworks, instruments and

indicators: a review. ​Retrieved from:

https://www.bis.org/ifc/events/ws_micro_macro/jayaram_paper.pdf

GJ. Schinasi, (​2004). Defining Financial Stability. Retrieved from:

https://www.imf.org/external/pubs/ft/wp/2004/wp04187.pdf

Fama và Schwert. (1977). Stock returns, inflationary expectations and real activity: New
Evidence. American Economic Review 71, 4, p.545-565.

Mahmudul Alam and Salah Uddin. (2009). Relationship between interest rate and stock price:
Empirical evidence from developed and developing countries. International Journal of
Business and Management, Vol.4, No.3, p.43 – 51

Adel Al Sharkas và Marwan Al Zoubi. (2011). Stock prices and inflation: Evidence from
Jordan, Saudi Arabia, Kuwait and Morocco. Economic Research Forum. Working Paper
No.653.
Seri Suriani, (2015). Impact of Exchange Rate on Stock Market. Retrieved from:
https://www.researchgate.net/publication/306122857_Impact_of_Exchange_Rate_on_Stock_
Market

D Pilinkus, (2010). Macroeconomic indicators and their impact on stock market performance
in the short and long run: The case of the baltic states. Retrieved from:
https://www.tandfonline.com/doi/pdf/10.3846/tede.2010.19

K Celebi, (2019). The Impact of Macroeconomic Factors on the German Stock Market:
Evidence for the Crisis, Pre- and Post-Crisis Periods. Retrieved from:
https://www.mdpi.com/2227-7072/7/2/18/pdf

C Barnor, (2014). The Effect of Macroeconomic Variables on Stock Market Returns in

Ghana (2000-2013). Retrieved from:
https://scholarworks.waldenu.edu/cgi/viewcontent.cgi?article=1131&context=dissertations