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The effect of monetary policy on monthly and quarterly stock market returns: cross-country evidence and sensitivity analyses

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  • J. Benson Durham

Abstract

Several studies report an empirical link between changes in monetary policy and short- as well as long-run stock market performance in the United States. Such findings are germane both to the study of market anomalies and to monetary policy transmission mechanisms. Previous univariate time-series results on long-run data, which use the discount rate as the main policy indicator, seem robust to alternative specifications of stock price returns given data on 16 countries from 1956 through 2000. However, out-of-sample tests indicate that the relation has largely decreased over time. Also, panel regressions, which notably include cross-sectional variance and therefore are particularly relevant to market participants, suggest that the relation is less sturdy, and consideration of excess as opposed to raw equity price returns in time-series regressions indicates no relation. Finally, alternative measures of central bank policy suggest a weaker and a diminished correlation between monetary policy changes and long-run stock market performance.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2001-42.

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Date of creation: 2001
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Handle: RePEc:fip:fedgfe:2001-42

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Keywords: Monetary policy ; Stock market;

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References

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Citations

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Cited by:
  1. Bredin, Don & Hyde, Stuart & O'Reilly, Gerard, 2005. "European Monetary Policy Surprises: The Aggregate and Sectoral Stock Market Response," Research Technical Papers 10/RT/05, Central Bank of Ireland.
  2. Wongswan, Jon, 2009. "The response of global equity indexes to U.S. monetary policy announcements," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 344-365, March.
  3. Don Bredin & Caroline Gavin & Gerard O Reilly, 2003. "The Influence of Domestic and International Interest Rates on the ISEQ," The Economic and Social Review, Economic and Social Studies, vol. 34(3), pages 249–265.
  4. Tang, Yong & Luo, Yong & Xiong, Jie & Zhao, Fei & Zhang, Yi-Cheng, 2013. "Impact of monetary policy changes on the Chinese monetary and stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4435-4449.
  5. Oreste Napolitano, 2006. "Is The Impact Of Ecb Monetary Policy On Emu Stock Market Returns Asymmetric?," Working Papers 3_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  6. J. Benson Durham, 2003. "Does monetary policy affect stock prices and Treasury yields? An error correction and simultaneous equation approach," Finance and Economics Discussion Series 2003-10, Board of Governors of the Federal Reserve System (U.S.).
  7. Ryan Compton & Syeed Khan, 2010. "An examination of the stability of short-run Canadian stock predictability," Economics Bulletin, AccessEcon, vol. 30(2), pages 1293-1306.
  8. Heimonen, Kari, 2010. "Money and equity returns in the Euro area," Global Finance Journal, Elsevier, vol. 21(2), pages 152-169.
  9. Rapach, David E. & Wohar, Mark E. & Rangvid, Jesper, 2005. "Macro variables and international stock return predictability," International Journal of Forecasting, Elsevier, vol. 21(1), pages 137-166.

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