The asymmetric response of stock returns to changes in money supply and key policy interest rates: Evidence from the Philippine financial sector stock index for the period of 2003-2007

This study aimed to determine if changes in key policy interest rates and growth of money aggregates have asymmetric effects on stock returns during bear and bull markets using Markov Switching models. Evidence from the stock market index from 2003 to 2007 for the financial sector in the PSE showed that stock returns respond asymmetrically; a contractionary monetary policy would increase stock returns in a bull market but would decrease stock returns in a bear market. This empirical finding might be different from the conventional negative relationship between interest rates and stock returns, but this can be attributed to the uniqueness of financial institutions. Furthermore, the Markov Switching models showed that an increase in interest rates would increase regime switching probabilities and would decrease the persistency of bull and bear markets