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The Fed and the Stock Market: An Identification Based on Intraday Futures Data

  • D’Amico, Stefania
  • Farka, Mira

This article develops a new identification procedure to estimate the contemporaneous relation between monetary policy and the stock market within a vector autoregression (VAR) framework. The approach combines high-frequency data from the futures market with the VAR methodology to circumvent exclusion restrictions and achieve identification. Our analysis casts doubt on VAR models imposing a recursive structure between innovations in policy rates and stock returns. We find that a tightening in policy rates has a negative impact on stock prices and that the Federal Reserve (Fed) has responded significantly to movements in the stock market. Estimates are robust to various model specifications.

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File URL: http://pubs.amstat.org/doi/abs/10.1198/jbes.2009.08019
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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 29 (2011)
Issue (Month): 1 ()
Pages: 126-137

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Handle: RePEc:bes:jnlbes:v:29:i:1:y:2011:p:126-137
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