Monetary policy and stock valuation: structural VAR identification and size effects |
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| Authors: | Alexandros Kontonikas Zivile Zekaite |
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| Institution: | 1. Essex Business School, Finance Subject Group, University of Essex, Colchester, UKa.kontonikas@essex.ac.uk;3. Adam Smith Business School, University of Glasgow, Glasgow, UK |
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| Abstract: | This paper examines the relationship between the US monetary policy and stock valuation using a structural VAR framework that allows for the simultaneous interaction between the federal funds rate and stock market developments based on the assumption of long-run monetary neutrality. The results confirm a strong, negative and significant monetary policy tightening effect on real stock prices. Furthermore, we provide evidence consistent with a delayed response of small stocks to monetary policy shocks relative to large stocks. |
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| Keywords: | Monetary policy Stock market Size effect SVAR |
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