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Monetary Policy and Stock Prices: Does the “Fed Put” Work When It Is Most Needed?

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  • Alexander Kurov
  • Chen Gu

Abstract

Most studies of the effect of monetary policy on asset prices use the event study methodology with daily data. The resulting estimates suffer from bias due to omitted variables and endogeneity of policy decisions. We provide evidence that this bias becomes so large during the 2007–2008 financial crisis that it reverses the sign of the estimated stock market response to monetary news, leading to an erroneous conclusion that interest rate cuts are bad news for stocks. We also examine the stock market reaction to monetary policy during the zero lower bound period. The results show a significant bias in daily event study estimates of the stock market response to news about the future path of monetary policy. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 36:1210–1230, 2016

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  • Alexander Kurov & Chen Gu, 2016. "Monetary Policy and Stock Prices: Does the “Fed Put” Work When It Is Most Needed?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(12), pages 1210-1230, December.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:12:p:1210-1230
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    Cited by:

    1. Gu, Chen & Kurov, Alexander & Wolfe, Marketa Halova, 2018. "Relief Rallies after FOMC Announcements as a Resolution of Uncertainty," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 1-18.
    2. Eksi, Ozan & Tas, Bedri Kamil Onur, 2017. "Unconventional monetary policy and the stock market’s reaction to Federal Reserve policy actions," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 136-147.
    3. Park, Keun Woo & Hong, Dahae & Oh, Ji Yeol Jimmy, 2019. "Investor behavior around monetary policy announcements: Evidence from the Korean stock market," Finance Research Letters, Elsevier, vol. 28(C), pages 355-362.
    4. Lakdawala, Aeimit & Schaffer, Matthew, 2019. "Federal reserve private information and the stock market," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 34-49.
    5. Benchimol, Jonathan & Saadon, Yossi & Segev, Nimrod, 2023. "Stock market reactions to monetary policy surprises under uncertainty," International Review of Financial Analysis, Elsevier, vol. 89(C).
    6. Kurov, Alexander & Stan, Raluca, 2018. "Monetary policy uncertainty and the market reaction to macroeconomic news," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 127-142.
    7. Gene Birz & Sandip Dutta & Han Yu, 2022. "Economic forecasts, anchoring bias, and stock returns," Financial Management, Financial Management Association International, vol. 51(1), pages 169-191, March.
    8. Radeef Chundakkadan & Subash Sasidharan, 2021. "Central bank's money market operations and daily stock returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 136-152, January.
    9. Gu, Chen & Kurov, Alexander & Stan, Raluca, 2023. "Monetary policy and uncertainty resolution in commodity markets," Finance Research Letters, Elsevier, vol. 55(PA).
    10. Kam F. Chan & Philip Gray, 2018. "Volatility jumps and macroeconomic news announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(8), pages 881-897, August.

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