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State-Dependent Stock Market Reactions to Monetary Policy

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Author Info
Troy Davig
Jeffrey R. Gerlach

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Abstract

This paper presents a test of the response of stock prices to Federal Reserve policy shocks using a Markov-switching framework. The framework endogenously identifies two distinct regimes. The first is a state where the S&P 500 index exhibits a significantly negative response to unexpected changes in the target federal funds rate in the thirty-minute window bracketing FOMC announcements, a result consistent with previous work. However, the model identifies a second regime from September 1998 to September 2002, in which the response of stock prices to policy shocks is insignificant and over ten times more volatile relative to the other regime. 

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 2 (2006)
Issue (Month): 4 (December)
Pages:
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Handle: RePEc:ijc:ijcjou:y:2006:q:4:a:3

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fabio Milani, 2008. "Learning about the Interdependence between the Macroeconomy and the Stock Market," Working Papers 070819, University of California-Irvine, Department of Economics. [Downloadable!]
  2. Chulia-Soler, H. & Martens, M.P.E. & Dijk, D.J.C. van, 2007. "The Effects of Federal Funds Target Rate Changes on S&P100 Stock Returns, Volatilities, and Correlations," Research Paper ERS-2007-066-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  3. Brent Bundick, 2007. "Do federal funds futures need adjustment for excess returns? a state-dependent approach," Research Working Paper RWP 07-08, Federal Reserve Bank of Kansas City. [Downloadable!]
  4. Troy Davig & Jeffrey R. Gerlach, 2006. "Monetary Policy, the Bond Market, and Changes in FOMC Communication Policy," Working Papers 31, Department of Economics, College of William and Mary. [Downloadable!]
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