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UK Stock returns & the impact of domestic monetary policy shocks

Author

Listed:
  • Donal Bredin
  • Stuart Hyde
  • Gerard O'Reilly

Abstract

We investigate the influence of changes in UK monetary policy on UK stock returns and the possible reasons behind such a response. Firstly, we conduct an event study to assess the impact of unexpected changes in monetary policy on aggregate and sectoral stock returns. The decomposition of unexpected changes in the policy rate is based on futures markets data. Secondly, using a variance decomposition in the spirit of Campbell (1991) we attempt to identity the channels behind the response of stock returns to monetary policy surprises. The variance decomposition results indicate that the monetary policy shock leads to a persistent negative response in terms of future excess returns for a number of sectors.

Suggested Citation

  • Donal Bredin & Stuart Hyde & Gerard O'Reilly, 2005. "UK Stock returns & the impact of domestic monetary policy shocks," Centre for Financial Markets Working Papers 10197/1167, Research Repository, University College Dublin.
    • Handle: RePEc:rru:cfmwps:10197/1167
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    File URL: http://hdl.handle.net/10197/1167
    File Function: First version, 2005
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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G1 - Financial Economics - - General Financial Markets

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