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Monetary policy expectations and financial Markets: A Quantile-on-Quantile connectedness approach

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  • Naifar, Nader

Abstract

This study investigates how the United States (US) monetary policy expectations impact various financial market segments using a quantile-on-quantile connectedness approach. It employs the USD 1-year interest rate swap (1YUSA) as a proxy for these expectations. It also examines the interconnectedness between these expectations and key financial markets, including stocks, bonds, exchange rates, and derivatives. The analysis reveals a complex, nonlinear relationship. The impact of monetary policy expectations varies significantly across different market conditions and quantiles. Strong connectedness is particularly evident during extreme market conditions, with heightened sensitivity during periods of economic uncertainty or anticipated policy shifts. The results demonstrate that monetary policy expectations disproportionately influence financial markets, particularly during market stress. The strongest effects appear in the lower quantiles of interest rates and the upper quantiles of market indices. These findings are crucial for policymakers and investors, providing deeper insights into the market’s response to monetary signals. They also enhance strategies for risk management and policy formulation in an increasingly volatile global financial environment.

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  • Naifar, Nader, 2025. "Monetary policy expectations and financial Markets: A Quantile-on-Quantile connectedness approach," The North American Journal of Economics and Finance, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:ecofin:v:77:y:2025:i:c:s1062940825000294
    DOI: 10.1016/j.najef.2025.102389
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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