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Monetary Policy, External Finance Dependence, and the Cross-section of Stock Returns: A FAVAR Approach

  • Victor Duarte

    (MIT)

  • Carlos Carvalho

    (Pontificia Universidade Catolica do Rio de Janeiro)

  • Tiago Berriel

    (EPGE-FGV)

We use an identified factor-augmented vector autoregression (FAVAR) to estimate the impact of monetary policy shocks on the cross-section of stock returns. Our FAVAR combines unobserved factors extracted from a large set of financial and macroeconomic indicators with the Federal Funds rate. We find that monetary policy shocks have heterogeneous effects on the cross-section of stock returns. These effects are well explained by the degree of external finance dependence, and by variables that arguably correlate with it. We also find that the cross- section of stock return responses to monetary policy shocks can be very well explained by the response of the Fama-French factors to those shocks.

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File URL: https://economicdynamics.org/meetpapers/2013/paper_1214.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1214.

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Date of creation: 2013
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Handle: RePEc:red:sed013:1214
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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