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Monetary policy, stock market and sectoral comovement

Author

Listed:
  • Pierre Guérin

    (OECD)

  • Danilo Leiva-Leon

    (Banco de España)

Abstract

This paper evaluates the role that sectoral comovement plays in the propagation of monetary policy shocks on the stock market. In doing so, we introduce a factor-augmented vector autoregressive model with heterogeneous regime-switching factor loadings, denoted as MS2-FAVAR, that allows us to jointly assess (i) potential changes in the degree of comovement between each sector-specific stock return and the aggregate stock market as well as (ii) the propagation of monetary policy shocks taking into account such changes in comovement. We find that the efects of monetary policy shocks on stock returns are substantially amplied when industries experience a stronger degree of comovement, suggesting that a more interconnected stock market is more prone to the propagation of monetary policy shocks. The MS2-FAVAR model is also well-suited to perform a network analysis to characterize linkages in large datasets.

Suggested Citation

  • Pierre Guérin & Danilo Leiva-Leon, 2017. "Monetary policy, stock market and sectoral comovement," Working Papers 1731, Banco de España.
    • Handle: RePEc:bde:wpaper:1731
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    stock market; monetary policy; markov-switching; factor model; network analysis;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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