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Market efficiency, discount-rate changes, and stock returns: A long-term perspective

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  • Laurie Prather
  • William Bertin

Abstract

This paper examines the market efficiency issue by analyzing stock returns surrounding Fed announcements of discount-rate changes. Based on an analysis ofex post returns over a 58-year period, the results provide evidence of long-term market efficiency. Consistent with recent literature, the findings also reveal some predictability in return patterns where an active trading strategy based on directional reversals in the pattern of discount rate changes outperforms a passive buy-and-hold approach. The results indicate that the proposed active trading produces substantially higher risk-adjusted returns than the buy-and-hold strategy. Copyright Springer 1999

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  • Laurie Prather & William Bertin, 1999. "Market efficiency, discount-rate changes, and stock returns: A long-term perspective," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 23(1), pages 56-63, March.
    • Handle: RePEc:spr:jecfin:v:23:y:1999:i:1:p:56-63
    DOI: 10.1007/BF02752687
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    References listed on IDEAS

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    1. V. Vance Roley & Rick Troll, 1984. "The impact of discount rate changes on market interest rates," Economic Review, Federal Reserve Bank of Kansas City, vol. 69(Jan), pages 27-39.
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    3. Rozeff, Michael S., 1974. "Money and stock prices : Market efficiency and the lag in effect of monetary policy," Journal of Financial Economics, Elsevier, vol. 1(3), pages 245-302, September.
    4. Grube, R Corwin & Joy, O Maurice & Panton, Don B, 1979. "Market Responses to Federal Reserve Changes in the Initial Margin Requirement," Journal of Finance, American Finance Association, vol. 34(3), pages 659-674, June.
    5. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    6. Rik Hafer, 1986. "The response of stock prices to changes in weekly money and the discount rate," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 5-14.
    7. Waud, Roger N, 1970. "Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the 'Announcement Effect'," Econometrica, Econometric Society, vol. 38(2), pages 231-250, March.
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