Impact of Fed’s Monetary Policy Shocks on the Indian Stock Market through Overnight and Daytime Returns

Abstract

The Federal Reserve implemented unconventional monetary policy measures during the financial crisis of 2007-08 and the COVID-19 pandemic. The quantitative easing policies impacted not just the United States (US) and other advanced economies, but also emerging market economies. The impact of  monetary policy spillovers on NSE 500, Bank Nifty and other major sectors are examined between 2007 and 2021. This study analyses the Indian stock market by constructing US monetary policy shocks, using  financial market data through a regression-based framework. Explicitly accounting for the time lag between the two countries and the use of robust measures of monetary policy shocks makes the study more comprehensive. The study found that the US monetary policy shocks had a greater impact on Indian market when daily returns are decomposed into overnight and daytime returns, which is missing in the earlier literature.