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Large Firms and Monetary Policy Surprises: Unraveling Excessive Stock Price Sensitivity

Author

Listed:
  • Masyayuki Okada

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masayuki.okada@boj.or.jp))

  • Kazuhiro Teramoto

    (Graduate School of Economics, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo, Japan. 186-8603. (Email: k.teramoto@r.hit-u.ac.jp))

Abstract

This paper proposes a novel mechanism explaining why large firms exhibit stronger stock price responses to monetary policy surprises. Empirically, we show that endogeneity arising from the ex-post predictability of these surprises disproportionately affects large firms, leading to overestimated stock return responses. We develop an asset pricing model with granular-origin aggregate fluctuations and investors' imperfect knowledge of monetary policy rule parameters. The model demonstrates that belief revisions about the policy stance drive both monetary policy surprises and heterogeneous stock price responses through changes in the risk premium - even without investor heterogeneity or differential effects of policy shocks on firm fundamentals.

Suggested Citation

  • Masyayuki Okada & Kazuhiro Teramoto, 2025. "Large Firms and Monetary Policy Surprises: Unraveling Excessive Stock Price Sensitivity," IMES Discussion Paper Series 25-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:25-e-06
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    File URL: https://www.imes.boj.or.jp/research/papers/english/25-E-06.pdf
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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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