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Can federal reserve policy deviation explain response patterns of financial markets over time?


  • WANG, Kent

    () (The Wangyanan Institute for Studies in Economics, Xiamen University, China)

  • WANG, Shin-Huei

    () (Université catholique de Louvain, CORE, Belgium)

  • PAN, Zheyao

    () (The Wangyanan Institute for Studies in Economics, Xiamen University, China)


Yes. By using real-time structure break monitoring techniques we find evidence against monotonic response pattern, specifically three response structures of US stock market to the federal monetary policy actions based on a sample from 1989-2010. We re-estimate the market response in each of the three structures and find results stronger than previously documented especially in 2001-2008. We propose a “FedGap” variable which measures the deviation of Fed policy from the “Taylor Rule” in explanation and find it to be significant with economic meaning. We conclude that market responses proportionally to the size of the FedGap and it thus serves as a new “macro-state” factor which can explain the dynamic response patterns of financial markets. We also examine the issue from the bond market, and find similar results.

Suggested Citation

  • WANG, Kent & WANG, Shin-Huei & PAN, Zheyao, 2013. "Can federal reserve policy deviation explain response patterns of financial markets over time?," CORE Discussion Papers 2013029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2013029

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    References listed on IDEAS

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    Cited by:

    1. Chiara Canta & Marie-Louise Leroux, 2016. "Public and Private Hospitals, Congestion, and Redistribution," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(1), pages 42-66, February.
    2. RUSSO, Federica & MOUCHART, Michel & WUNSCH, Guillaume, 2013. "Confounding and control in a multivariate system. An issue in causal attribution," CORE Discussion Papers 2013068, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. MLINAR, Tanja B. & CHEVALIER, Philippe, 2013. "Pooling in manufacturing: do opposites attract?," CORE Discussion Papers 2013040, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

    More about this item


    real-time structure breaks; dynamic market response; monetary policy; Taylor Rule; FedGap;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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