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Monetary policy and stock returns: Financing constraints and asymmetries in bull and bear markets

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  • Jansen, Dennis W.
  • Tsai, Chun-Li

Abstract

We examine asymmetries in the impact of monetary policy surprises on stock returns between bull and bear markets in the period 1994 to 2005. We ask how these impacts respond to the relative ability of firms to obtain external finance. We find that the impact of a surprise monetary policy in a bear market is large, negative, and statistically significant, and this holds across size decile portfolios. The impact of a surprise policy action in a bear market for most industries is significantly greater than the impact of surprise monetary policy in a bull market. Controlling for the capacity for external finance, stock returns of firms in bear states respond more than firms in bull states. Capacity for external finance is more important in a bear market, as it partially mitigates the larger impact of monetary policy in a bear market.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 17 (2010)
Issue (Month): 5 (December)
Pages: 981-990

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Handle: RePEc:eee:empfin:v:17:y:2010:i:5:p:981-990

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Web page: http://www.elsevier.com/locate/jempfin

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Keywords: Stock returns Monetary policy Asymmetries Bear market Financing constraints;

References

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Citations

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Cited by:
  1. Tsai, Chun-Li, 2014. "The effects of monetary policy on stock returns: Financing constraints and “informative” and “uninformative” FOMC statements," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 273-290.
  2. Alexandros Kontonikas & Ronald MacDonald & Aman Saggu, 2012. "Stock market reaction to fed funds rate surprises: state dependence and the financial crisis," Working Papers 2012_11, Business School - Economics, University of Glasgow.
  3. Tang, Yong & Luo, Yong & Xiong, Jie & Zhao, Fei & Zhang, Yi-Cheng, 2013. "Impact of monetary policy changes on the Chinese monetary and stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4435-4449.
  4. Beatrice D. Simo - Kengne & Mehmet Balcilar & Rangan Gupta & Monique Reid & Goodness C. Aye, 2012. "Is the relationship between monetary policy and house prices asymmetric in South Africa? Evidence from a Markov-Switching Vector Autoregressive mode," Working Papers 14/2012, Stellenbosch University, Department of Economics.
  5. WANG, Kent & WANG, Shin-Huei & PAN, Zheyao, 2013. "Can federal reserve policy deviation explain response patterns of financial markets over time?," CORE Discussion Papers 2013029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Zeng, Jhih-Hong & Peng, Chi-Lu & Chen, Ming-Chi & Lee, Chien-Chiang, 2013. "Wealth effects on the housing markets: Do market liquidity and market states matter?," Economic Modelling, Elsevier, vol. 32(C), pages 488-495.
  7. Hsu, Kuang-Chung & Chiang, Hui-Chu, 2011. "Nonlinear effects of monetary policy on stock returns in a smooth transition autoregressive model," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(4), pages 339-349.
  8. Acuña, Andres A. & Pinto, Cristian F., 2012. "Respuesta del retorno accionario a la politica monetaria: Evidencia para el mercado chileno
    [Stock return response to monetary policy: Evidence from the Chilean market]
    ," MPRA Paper 41091, University Library of Munich, Germany.

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