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Stock market’s reaction to money supply: a nonparametric analysis


  • Taamouti Abderrahim

    () (Durham University Business School, Mill Hill Lane, Durham, DH1 3LB, UK)


We empirically investigate the link between monetary policy measures and stock market prices. We document the following stylized facts about stock market’s reaction to money supply and examine the effect across the entire distribution of stock returns. Using a nonparametric Granger causality in mean test, we find that money supply has no impact on stock prices, which confirms many of the existing results that were based on linear mean regression. By contrast, when a nonparametric causality in distribution (hereafter general Granger causality) test and quantile regression based test were used, the effect of money becomes apparent and statistically very significant. Interestingly, money supply affects the left and right tails of stock return distribution but not its center. This might indicate that the monetary policy measure money supply is effective only during recessions and expansions. We have also investigated the extent to which the impact of money supply on stock returns detected by the nonparametric and quantile regression based tests can be attributed to a time-varying conditional variance of stock returns. After controlling for volatility persistence in stock returns, we continue to find evidence for the reaction of conditional distribution of stock market returns to money supply growth rate.

Suggested Citation

  • Taamouti Abderrahim, 2015. "Stock market’s reaction to money supply: a nonparametric analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(5), pages 669-689, December.
  • Handle: RePEc:bpj:sndecm:v:19:y:2015:i:5:p:669-689:n:1

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    References listed on IDEAS

    1. Balvers, Ronald J. & Huang, Dayong, 2009. "Money and the C-CAPM," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(02), pages 337-368, April.
    2. Ansgar Belke & Jens Klose, 2011. "Does the ECB Rely on a Taylor Rule During the Financial Crisis? Comparing Ex-post and Real Time Data with Real Time Forecasts," Economic Analysis and Policy, Elsevier, vol. 41(2), pages 147-171, September.
    3. repec:taf:jnlbes:v:30:y:2012:i:2:p:275-287 is not listed on IDEAS
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