What determines the stock market's reaction to monetary policy statements?

We find that information communicated through monetary policy statements has important business cycle dependent implications for stock prices. For example, during periods of economic expansion, stocks tend to respond negatively to announcements of higher rates ahead. In recessions, however, we find a strong positive reaction of stocks to seemingly similar signals of future monetary tightening. We provide evidence that the state dependence in the stock market's response is explained by information about the expected equity premium and future corporate cash flows contained in monetary policy statements. We also show state dependence in the average stock returns on days of scheduled FOMC meetings and in the impact of monetary policy statements on stock and bond return volatility.     

Does monetary policy determine stock market liquidity? New evidence from the euro zone

The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of aggregate stock market liquidity in the German, French and Italian markets. Furthermore, the effect of monetary policy is significantly stronger for smaller stocks, suggesting a non-linear impact of monetary policy on stock liquidity.     

Investor sentiment and the stock market’s reaction to monetary policy

This paper shows that monetary policy decisions have a significant effect on investor sentiment. The effect of monetary news on sentiment depends on market conditions (bull versus bear market). We also find that monetary policy actions in bear market periods have a larger effect on stocks that are more sensitive to changes in investor sentiment and credit market conditions. Overall, the results show that investor sentiment plays a significant role in the effect of monetary policy on the stock market.     

On Monetary Policy and Stock Market Anomalies

This study utilizes a macro‐based VAR framework to investigate whether stock portfolios formed on the basis of their value, size and past performance characteristics are affected in a different manner by unexpected US monetary policy actions during the period 1967–2007. Full sample results show that value, small capitalization and past loser stocks are more exposed to monetary policy shocks compared with growth, big capitalization and past winner stocks. Sub‐sample analysis, motivated by variation in the realized premia and parameter instability, reveals that the impact of monetary policy shocks on these portfolios is significant and pronounced only during the pre‐1983 period.     

Stock Market Reaction to Monetary Policy: An Event Study Analysis of the Brazilian Case

This article examines the relationship between the monetary policy implemented by the Central Bank of Brazil and the stock market. We implement event study analysis and analyze the effect of the anticipated and unanticipated components of monetary policy decisions on the returns of the IBOVESPA index and 53 stocks. We find that monetary policy has a significant effect on the stock market, but is only responsible for a small proportion of market variation. The analysis at the sector level with expected returns identifies that the financial sector is the most affected by this policy, whereas with excess returns only industrial goods are significantly affected. Moreover, individual assets respond in a rather heterogeneous fashion to monetary policy; however, when we look at excess returns, we identify a reduction in the intensity and in the number of companies impacted by monetary policy. Finally, the monetary shock is explained by unanticipated variations in the unemployment rate, in the Industrial Production Index, in the General Market Price Index, and in the Broad Consumer Price Index.     

Stock liquidity and the Taylor rule

This paper examines how stock market liquidity and commonality in liquidity are impacted by real-time output gap and inflation, as these macroeconomic variables have been shown to be the main drivers of monetary policy according to the Taylor rule. We show that an increase in the output gap and inflation lowers stock liquidity and increases commonality in liquidity, since it points to a contractionary monetary policy and is likely to lead to a decline in the liquidity providers' funding liquidity. This effect is larger for stocks with low market capitalization and low liquidity.     

Monetary Policy and Stock Prices in an Open Economy

This paper studies monetary policy in a two-country model where agents can invest their wealth in both stock and bond markets. In our economy the foreign country hosts the only active equity market where also residents of the home country can trade stocks of listed foreign firms. We show that, in order to achieve price stability, the Central Banks in both countries should grant a dedicated response to movements in stock prices driven by relative productivity shocks. Determinacy of rational expectations equilibria and approximation of the Wicksellian interest rate policy by simple monetary policy rules are also investigated.     

Empirical investigation of changes in policy uncertainty on stock returns—Evidence from China’s market

This study finds evidence that a rise in economic policy uncertainty (EPU) leads to a decline in stock returns in Chinese market; however, a positive coefficient was observed in the lagged EPU as stock prices rebound. This phenomenon also holds true for a rise in uncertainty innovations in fiscal policy, monetary policy, trade policy and global policy. The evidence leads to conclude that policy uncertainty premiums should be priced into China’s stock prices. An escalation of U.S. policy uncertainty has a significantly harmful effect on Chinese stocks regardless of whether firms are stated own or listed on U.S. market.     

股票市场对货币政策传导机制影响的实证研究——基于脉冲响应函数和方差分解的技术分析

随着股票市场的蓬勃发展及其与国民经济的联系日益密切,货币政策的传导机制和效应必然受到股票市场发展的影响,同时股票市场也逐渐成为货币政策传导的重要渠道之一。本文首先对货币政策的传导机制与股票市场的关联机制进行分析,然后运用协整分析、向量自回归模型(VAR)、向量误差修正模型(VECM)、脉冲响应函数、方差分解技术等计量方法对我国股票市场对货币政策传导机制的影响进行了实证分析。结果显示股票市场已经成为传导货币政策的一个主要渠道,中央银行制定货币政策时必须要考虑股票市场。     

Nonlinear relationship between monetary policy and stock returns: Evidence from the U.S.

This paper studies the relationship between monetary policy and stock market return in the U.S. using nonlinear econometric models. It first employs a univariate Markov-switching model on each of the three stock indices and three monetary policy variables, displaying significant regime-switching patterns and common movements. This paper then uses a Markov-switching dynamic bi-factor model to simultaneously extract two latent common factors from stock indices and monetary policy variables to represent monetary policy changes and stock market movements separately. The smoothed probabilities of regimes demonstrate that expansionary monetary policy regimes follow economic recessions, but bear stock markets usually occur before economic recessions. The maximum likelihood estimation results show that expansionary monetary policy such as a decrease in the federal funds rate raises stock returns, but stock returns don't directly influence monetary policy decision.     

The Credit Channel at the Zero Lower Bound through the Lens of Equity Prices

This study examines the impact of unconventional monetary policies on the stock market when the short‐term nominal interest rate is stuck at the zero lower bound (ZLB). Unconventional monetary policies appear to have significant effects on stock prices and the effects differ across stocks. In agreement with existing credit channel theories, I find that firms subject to financial constraints react more strongly to unconventional monetary policy shocks [especially large‐scale asset purchases (LSAPs)] than do less constrained firms. These results imply that the credit channel is as important as the interest rate channel in the transmission of unconventional monetary policies at the ZLB.     

我国股票市场和房地产市场对货币流速的影响

探讨股市和房市对货币流速的效应是对货币流速影响因素进行实证研究的一个方向。实证结果表明,我国股市、房市变量与狭义货币流速、广义货币流速均存在长期均衡关系,且与货币流速负相关,狭义货币流速主要受股市影响,广义货币流速主要受房市影响。股市和房市导致货币流速下降的原因,有助于解释我国的一些经济现象,同时也提醒我们应进一步规范股市和房市的发展,央行制定货币政策时应该考虑股市和房市对货币需求的影响,要采取预防性货币政策,保持经济与金融的稳健运行。     

The Impact of Monetary and Fiscal Policy Shocks on Stock Markets: Evidence from China

We study the impact of Chinese monetary and fiscal policy shocks and the interaction of the two policies on stock markets. We find that, first, when we focus on the contemporaneous correlation, Chinese fiscal policy has significant, negative contemporaneous relationships with stock market performance, while monetary policy’s impact on stock market performance varies, depending on the fiscal policy. Second, with respect to the lagged variables, Chinese monetary and fiscal policy both have a significant and direct positive effect on stock market performance. Meanwhile, interaction between the two policies plays an extremely important role in explaining the development of stock markets.     

Monetary policy and stock market dynamics across monetary regimes

This paper examines the dynamic linkages between monetary policy and the stock market during the three distinct monetary regimes of Burns, Volcker and Greenspan since the 1970s. Some major findings are the following. First, in the 1990s it appears that there was a disconnection between Federal Reserve actions (via the federal funds rate) and responses by the stock market. Second, the impact of inflation on the stock market did not surface as significant in the later parts of 1980s and the 1990s. And third, significant asymmetric effects of monetary policy on the stock markets were observed throughout each monetary regime but these were more pronounced during bear markets than bull markets. These results suggest that there was no consistent dynamic relationship between monetary policy and the stock market and that the nature of such dynamics was different in each of the three monetary regimes.     

Show me the money: The monetary policy risk premium

We create a parsimonious monetary policy exposure (MPE) index based on observable firm characteristics that previous studies link to how stocks react to monetary policy. Our index successfully captures stocks’ responses to both conventional and unconventional monetary policy. Stocks whose prices react more positively to expansionary monetary policy (high-MPE stocks) earn lower average returns. This result is consistent with the notion that high-MPE stocks provide a hedge against bad economic shocks, to which the Federal Reserve responds with expansionary monetary policy. A long-short trading strategy designed to exploit this effect achieves an annualized Sharpe Ratio of 0.77.     

Real Activity, Inflation, Stock Returns, and Monetary Policy

We find that contractionary monetary policy shocks generate statistically significant movements in inflation and expected real stock returns, and that these movements go in opposite directions. Since positive shocks to output precipitate monetary tightening, we argue that the countercyclical monetary policy process is important in explaining the negative correlation between inflation and stock returns. Examining the 1979–1982 period, we find that monetary policy tightens significantly in response to positive shocks to inflation, and that the impact of monetary policy shocks on stock returns is negative and volatile. Therefore, we see evidence that an “anticipated policy” hypothesis is at work.     

The impact of monetary policy surprises on asset return volatility: the case of Germany

This paper investigates the impact of monetary policy surprises by the FED or Bundesbank/ECB on the return volatility of German stocks and bonds using a GARCH-M model. We show that stock return volatility is susceptible to monetary policy surprises in the United States, whereas monetary policy surprises in the Euro zone matter for bond return volatility. These findings are robust for other Euro zone stock markets, but not significant for other Euro zone bond markets. The empirical evidence also suggests that monetary policy surprises have larger effects on German stock return volatility in bear markets than in bull phases. Moreover, our results support the claim that stock return volatility can be negatively correlated with stock returns, contradicting predictions made by many asset pricing models (e.g., CAPM or ICAPM) and the empirical finding of an insignificant relationship often reported in the literature.

Monetary policy and stock prices – Cross-country evidence from cointegrated VAR models

This study applies the Cointegrated Vector-Autoregressive (CVAR) model to analyze the long-run relationships and short-run dynamics between stock markets and monetary policy across five developed and three emerging economies. Our main aim is to check whether monetary policy plays an important role for stock market developments. As an innovation, monetary policy enters the analysis from three angles: in the form of a broad monetary aggregate, short-term interest rates and net capital flows. Based on this framework, we analyze whether central banks are able to influence stock market developments. Our findings suggest different patterns and causalities for emerging and industrial economies with the stock markets of the former economies more frequently related to monetary aggregates and capital flows. A direct long-run impact from short-term interest rates on stock prices is only observed for 3 out of 8 economies.     

Monetary policy,exchange rates and stock prices in the Middle East region

A structural vector autoregressive model is employed to investigate the impact of monetary policy and real exchange rate shocks on the stock market performance of Kuwait, Oman, Saudi Arabia, Egypt and Jordan. In order to identify the structural shocks both short run and long run restrictions are applied. Unlike previous literature the contemporaneous interdependence between the financial variables is left unrestricted to give a more accurate depiction of the relationships. The heterogeneity of the results reflects the different monetary policy frameworks and stock market characteristics of these countries. Mainly, monetary policy and the real exchange rate shocks have a significant short run impact on the stock prices of the countries that apply a relatively more independent monetary policy and flexible exchange rates.     

股票价格、货币政策和宏观经济波动

本文对包含股票价格在内的新凯恩斯模型的结构方程进行估计,分析了股票价格和货币政策与宏观经济波动之间的关系,认为股票价格与宏观经济波动密切相连,货币政策调整可以平滑经济波动。在此基础上,比较了不同的货币政策规则的宏观调控效果,得到的结论是,将股票价格波动纳入货币政策的调控范围会改善货币政策效果,有助于稳定宏观经济。