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Do fundamentals explain the international impact of U.S. interest rates? evidence at the firm level

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  • John Ammer
  • Clara Vega
  • Jon Wongswan

Abstract

This paper analyzes the impact of U.S. monetary policy announcement surprises on U.S. and foreign firm-level equity prices. We find that U.S. monetary policy has important influences on foreign equity prices on average, but with considerable variation across firms. We have found that this differing response reflects a range of factors, including the extent of a foreign firm's exposure to U.S. demand, its dependence on external financing, the behavior of interest rates in its home country, and its sensitivity to portfolio adjustment by U.S. investors. The cross-firm variation in the response is correlated with the firm's CAPM beta; but it cannot fully explain this variation. More generally, we see these results as shedding some additional light on the nature and extent of the monetary and financial linkages between the United States and the rest of the world. In particular, since we are able to explain differences across foreign firms' responses through established theories of monetary transmission, our results are consistent with the surprisingly large average foreign response to U.S. rates reflecting fundamentals, rather than an across-the-board behavioral over-reaction.

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File URL: http://www.federalreserve.gov/pubs/ifdp/2008/952/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/2008/952/ifdp952.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 952.

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Date of creation: 2008
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Handle: RePEc:fip:fedgif:952

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Related research

Keywords: Monetary policy - United States ; Interest rates ; International finance;

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Cited by:
  1. Bekaert, Geert & Ehrmann, Michael & Fratzscher, Marcel & Mehl, Arnaud, 2011. "Global crises and equity market contagion," Working Paper Series 1381, European Central Bank.
  2. Gust, Christopher & López-Salido, David, 2014. "Monetary policy and the cyclicality of risk," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 59-75.
  3. Gust, Christopher & López-Salido, J David, 2010. "Monetary Policy and the Cyclicality of Risk," CEPR Discussion Papers 7727, C.E.P.R. Discussion Papers.
  4. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Working Paper Series 1060, European Central Bank.

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