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Asymmetric Information, Stock Returns and Monetary Policy: A Theoretical and Empirical Analysis


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  • Bedri Kamil Onur Tas


It is known that stock returns are affected by monetary policy. This paper theoretically and empirically investigates whether asymmetric information between the Federal Reserve and the public causes the relation between stock returns and monetary policy actions. The paper concludes that asymmetric information between the Federal Reserve and the public is one of the reasons of effects of monetary policy actions on stock returns. A Kalman filter algorithm is constructed to analyze the information and learning dynamics between the Federal Reserve and a representative investor. Stock prices react to monetary policy actions because monetary policy actions reveal the private information that the Fed has about future inflation and output. Investors update their expectations after observing the Fed's actions and that produces a change in stock returns. The findings of the model are empirically investigated using VAR and impulse responses verify the theoretical findings

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 490.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:490

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Keywords: Asymmetric Information; Monetary Policy; Stock Returns; Kalman Filter; Learning;

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