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On Stock Market Returns and Monetary Policy

  • Willem Thorbecke

Boudoukh, Richardson, and Whitelaw (BRW) presented theoretical and empirical evidence explaining the expected inflation/stock return correlation. In concluding they stated that whether monetary policy has real effects is an open question. This paper addresses this question by examining how BRW's industry stock return data respond to monetary policy shocks. Monetary policy is measured by innovations in the federal funds rate and nonborrowed reserves, by narrative indicators, and by an event study of Federal Reserve policy changes. In every case the evidence indicates that expansionary policy increases ex-post stock returns. Results from estimating a multi-factor model also indicate that exposure to monetary policy increases an asset's ex-ante return.

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File URL: http://www.levyinstitute.org/pubs/wp139.pdf
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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_139.

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Date of creation: Apr 1995
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Handle: RePEc:lev:wrkpap:wp_139
Contact details of provider: Web page: http://www.levyinstitute.org

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  1. Willem Thorbecke & Lee Coppock, 1995. "Monetary Policy, Stock Returns, and the Role of Credit in the Transmission of Monetary Policy," Economics Working Paper Archive wp_133, Levy Economics Institute.
  2. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  3. Ammer, John & Campbell, John, 1993. "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Scholarly Articles 3382857, Harvard University Department of Economics.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds," NBER Working Papers 4699, National Bureau of Economic Research, Inc.
  5. Stulz, Rene M, 1986. " Asset Pricing and Expected Inflation," Journal of Finance, American Finance Association, vol. 41(1), pages 209-23, March.
  6. Thorbecke, Willem & Alami, Tarik, 1994. "The effect of changes in the federal funds rate target on stock prices in the 1970s," Journal of Economics and Business, Elsevier, vol. 46(1), pages 13-19, February.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  8. James Tobin, 1977. "Monetary Policies and the Economy -- The Transmission Mechanism," Cowles Foundation Discussion Papers 456, Cowles Foundation for Research in Economics, Yale University.
  9. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  10. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  11. Campbell, John Y & Mei, Jianping, 1993. "Where Do Betas Come From? Asset Price Dynamics and the," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 567-92.
  12. Boschen, John F & Mills, Leonard O, 1995. "The Relation between Narrative and Money Market Indicators of Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 33(1), pages 24-44, January.
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