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Can federal reserve policy deviation explain response patterns of financial markets over time?

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Author Info

  • WANG, Kent

    ()
    (The Wangyanan Institute for Studies in Economics, Xiamen University, China)

  • WANG, Shin-Huei

    ()
    (Université catholique de Louvain, CORE, Belgium)

  • PAN, Zheyao

    ()
    (The Wangyanan Institute for Studies in Economics, Xiamen University, China)

Abstract

Yes. By using real-time structure break monitoring techniques we find evidence against monotonic response pattern, specifically three response structures of US stock market to the federal monetary policy actions based on a sample from 1989-2010. We re-estimate the market response in each of the three structures and find results stronger than previously documented especially in 2001-2008. We propose a “FedGap” variable which measures the deviation of Fed policy from the “Taylor Rule” in explanation and find it to be significant with economic meaning. We conclude that market responses proportionally to the size of the FedGap and it thus serves as a new “macro-state” factor which can explain the dynamic response patterns of financial markets. We also examine the issue from the bond market, and find similar results.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2013029.

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Date of creation: 04 Jul 2013
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Handle: RePEc:cor:louvco:2013029

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Related research

Keywords: real-time structure breaks; dynamic market response; monetary policy; Taylor Rule; FedGap;

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References

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  1. Demiralp, Selva & Jorda, Oscar, 2004. "The Response of Term Rates to Fed Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 387-405, June.
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  9. Fleurbaey,Marc & Maniquet,François, 2011. "A Theory of Fairness and Social Welfare," Cambridge Books, Cambridge University Press, number 9780521715348.
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  12. Basistha, Arabinda & Kurov, Alexander, 2008. "Macroeconomic cycles and the stock market's reaction to monetary policy," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2606-2616, December.
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Cited by:
  1. CANTA, Chiara & LEROUX, Marie-Louise, 2013. "Public and private hospitals, congestion, and redistribution," CORE Discussion Papers 2013041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. MLINAR, Tanja B. & CHEVALIER, Philippe, 2013. "Pooling in manufacturing: do opposites attract?," CORE Discussion Papers 2013040, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. RUSSO, Federica & MOUCHART, Michel & WUNSCH, Guillaume, 2013. "Confounding and control in a multivariate system. An issue in causal attribution," CORE Discussion Papers 2013068, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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