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

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  • Kurov, Alexander
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    Abstract

    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.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-4WSRF29-3/2/3260c40264faa32e02b4835f2dfed79b
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 1 (January)
    Pages: 139-149

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:1:p:139-149

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

    Related research

    Keywords: Monetary policy Stock market Investor sentiment;

    References

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    1. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2002. "Market-based measures of monetary policy expectations," Finance and Economics Discussion Series 2002-40, Board of Governors of the Federal Reserve System (U.S.).
    2. Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc.
    3. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series 94-18, Board of Governors of the Federal Reserve System (U.S.).
    4. Michael Ehrmann & Marcel Fratzscher, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 354, European Central Bank.
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    8. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    9. Chen, Shiu-Sheng, 2009. "Predicting the bear stock market: Macroeconomic variables as leading indicators," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 211-223, February.
    10. Gregory W. Brown & Michael T. Cliff, 2005. "Investor Sentiment and Asset Valuation," The Journal of Business, University of Chicago Press, vol. 78(2), pages 405-440, March.
    11. Mark Doms, 2004. "Consumer sentiment and the media," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Oct 22.
    12. Hahn, Jaehoon & Lee, Hangyong, 2006. "Yield Spreads as Alternative Risk Factors for Size and Book-to-Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(02), pages 245-269, June.
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    15. Henry, Ólan T., 2009. "Regime switching in the relationship between equity returns and short-term interest rates in the UK," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 405-414, February.
    16. Gert Peersam & Frank Smets, 2002. "The industry effects of monetary policy in the Euro area," Working Paper Series 165, European Central Bank.
    17. Refet S. Gürkaynak, 2005. "Using federal funds futures contracts for monetary policy analysis," Finance and Economics Discussion Series 2005-29, Board of Governors of the Federal Reserve System (U.S.).
    18. Shiu-Sheng Chen, 2005. "Does Monetary Policy Have Asymmetric Effects on Stock Returns?," Macroeconomics 0502001, EconWPA, revised 01 Feb 2005.
    19. Kenneth L. Fisher & Meir Statman, 2006. "Market Timing In Regressions And Reality," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 29(3), pages 293-304.
    20. Kliger, Doron & Kudryavtsev, Andrey, 2008. "Reference point formation by market investors," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1782-1794, September.
    21. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
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    Citations

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    Cited by:
    1. Nikolaus Hautsch & Dieter Hess & David Veredas, 2010. "The Impact of Macroeconomic News on Quote Adjustments, Noise, and Informational Volatility," SFB 649 Discussion Papers SFB649DP2010-005, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Raes, L.B.D. & Eijffinger, S.C.W. & Mahieu, R.J., 2011. "Can the Fed Talk the Hind Legs off the Stock Market? (replaced by CentER DP 2012-012)," Discussion Paper 2011-072, Tilburg University, Center for Economic Research.
    3. Emrah İ. Çevik & Turhan Korkmaz & Erdal Atukeren, 2012. "Business confidence and stock returns in the USA: a time-varying Markov regime-switching model," Applied Financial Economics, Taylor and Francis Journals, vol. 22(4), pages 299-312, February.

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