Nonlinear effects of monetary policy on stock returns in a smooth transition autoregressive model |
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Authors: | Kuang-Chung Hsu Hui-Chu Chiang |
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Institution: | Department of Economics and International Business, University of Central Oklahoma, 100 North University Drive, Edmond, OK 73034, United States |
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Abstract: | This paper employs smooth transition autoregressive (STAR) models to investigate the nonlinear effect of monetary policy on stock returns. The change in the Federal funds rate is used as an endogenous measure of monetary policy, and the growth rate of industrial production is also considered in the model. Our results show that the relationship between the monetary policy and excess returns on stock prices is positive and nonlinear. A decrease in the Federal funds rate causes a larger increase in excess returns if excess stock returns are located in the extreme low excess returns regime. |
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Keywords: | JEL classification: E52 E44 G10 |
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