Stock market reactions to monetary policy announcements: evidence from Thailand

Abstract

This study examines how the Stock Exchange of Thailand (SET) responds to Bank of Thailand (BoT) Monetary Policy Committee (MPC) announcements over the period 2007–2025, using an event study methodology applied to 684 SET-listed stocks across 141 policy meetings. The study addresses the “Thailand Puzzle” documented in earlier research the anomalous finding that expected, rather than unexpected, policy rate changes drove Thai stock prices, in apparent contradiction of the efficient market hypothesis and tests four hypotheses concerning the market impact of policy surprises, the relative importance of expected versus unexpected rate changes, asymmetry between tightening and easing surprises, and sectoral heterogeneity in policy transmission. Policy rate changes are decomposed into expected and unexpected components using Bloomberg median analyst forecasts, and cumulative abnormal returns (CARs) are estimated using the market model over five event windows: pre-event [-2,-1] and [-1,0], the post-announcement window [0,+1] (the primary specification), and the combined windows [-1,+1] and [-2,+2]. All regressions use HC1 heteroskedasticity-robust standard errors and control for firm size, book-to-market, leverage, momentum, and crisis periods. The results show that policy rate surprises generate significant, negative, and economically meaningful abnormal returns, with a standard 25-basis-point unexpected associated with an abnormal price decline of approximately 0.27 percentage points in the primary event window. The unexpected component of the policy change dominates the expected component by a factor of roughly five once the announcement window is correctly measured, resolving the Thailand Puzzle and indicating that Thai equity markets process monetary policy information efficiently. The market's reaction to tightening and easing surprises is statistically symmetric at the point of announcement, although asymmetric anticipatory trading is detected in the day preceding the meeting. A day-by-day decomposition of abnormal returns further reveals that the cumulative price impact peaks one trading day after the announcement before partially reversing, consistent with short-lived overreaction. Finally, the transmission of policy surprises varies significantly across industries, with Real Estate, Financials, and Healthcare exhibiting the greatest sensitivity, while the Energy sector shows no significant response, consistent with its role as a natural hedge against the commodity-price conditions that typically accompany Thai monetary tightening. These findings contribute to the literature on monetary policy transmission in emerging equity markets and offer practical implications for the Bank of Thailand's communication strategy and for investors seeking to manage monetary policy risk in the Thai equity market.