How do banks' stock returns respond to monetary policy committee announcements in Turkey? Evidence from traditional versus new monetary policy episodes

- We analyze the responses of banks' stock returns to monetary policy surprises.
- We use a methodology which is robust to endogeneity and omitted variable problems.
- We detect heterogeneity in the responses of banks to monetary policy surprises.
- Domestic deposit banks with high interest payments respond more to monetary policy.
- Estimation results differ between traditional and new monetary policy episodes.

Using a methodology that is robust to endogeneity and omitted variable problems, it is found that the stock returns of all banks that are listed in Borsa Istanbul (BIST) respond significantly to the monetary policy surprises on Monetary Policy Committee (MPC) meeting days prior to May 2010. It is also shown that stock returns of banks for which interest payments constitute an important share in their balance sheets respond more aggressively to the changes in policy rates. In addition, foreign banks and participation banks give relatively less responses to monetary policy surprises. Finally, the estimation results suggest that since the Central Bank of the Republic of Turkey has started adopting a new monetary policy framework in May 2010, with various instruments and flexible timing, aggregate and individual bank indices have not responded significantly to the surprises on MPC meeting days.