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The Stock Market And The Fed

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Author Info
Becchetti Leonardo
Mattesini Fabrizio

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Abstract

The paper investigates the relationship between the stock market and the monetary policy of the Federal Reserve in the last twenty years. To this purpose we construct an Index of Stock Price Misalignment in which the fundamental value of the stocks is computed on the basis of the discounted cash flow approach and we then include this index, among the regressors, into a forward looking Taylor rule. Our findings show that the Fed reacts to deviations from fundamental values on the stock exchange by raising the Fed Funds rate.

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Paper provided by Tor Vergata University, CEIS in its series Departmental Working Papers with number 154.

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Date of creation: Dec 2001
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Handle: RePEc:rtv:ceiswp:154

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  1. Dasgupta, Susmita & Lahiri, Kajal, 1992. "A Comparative Study of Alternative Methods of Quantifying Qualitative Survey Responses Using NAPM Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 391-400, October.
  2. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," Journal of Business, University of Chicago Press, vol. 34, pages 411. [Downloadable!]
  3. James Claus, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October. [Downloadable!] (restricted)
  4. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06. [Downloadable!] (restricted)
  5. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March. [Downloadable!] (restricted)
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  6. Samy Ben Naceur & Mohamed Goaied, 2004. "The value relevance of accounting and financial information: panel data evidence," Applied Financial Economics, Taylor and Francis Journals, vol. 14(17), pages 1219-1224, November. [Downloadable!] (restricted)
  7. Kaplan, Steven N & Ruback, Richard S, 1995. " The Valuation of Cash Flow Forecasts: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 50(4), pages 1059-93, September. [Downloadable!] (restricted)
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  8. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  9. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September. [Downloadable!] (restricted)
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  10. Leonardo Becchetti & Fabrizio Adriani, 2004. "Do high-tech stock prices revert to their 'fundamental' value?," Applied Financial Economics, Taylor and Francis Journals, vol. 14(7), pages 461-476, April. [Downloadable!] (restricted)
  11. Charles M. C. Lee & James Myers & Bhaskaran Swaminathan, 1999. "What is the Intrinsic Value of the Dow?," Journal of Finance, American Finance Association, vol. 54(5), pages 1693-1741, October. [Downloadable!] (restricted)
  12. Bagella Michele & Becchetti Leonardo & Ciciretti Rocco, 2005. "Market versus Analysts Reaction: the Effect of Aggregate and Firm Specific News," Departmental Working Papers 211, Tor Vergata University, CEIS. [Downloadable!]
  13. Nelson, Edward, 2001. "UK Monetary Policy 1972-97: A Guide Using Taylor Rules," CEPR Discussion Papers 2931, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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