Abstract: Several studies report an empirical link between changes in monetary
policy and short- as well as long-run stock market performance in the United
States. Such findings are germane both to the study of market anomalies and
to monetary policy transmission mechanisms. Previous univariate time-series
results on long-run data, which use the discount rate as the main policy
indicator, seem robust to alternative specifications of stock price returns
given data on 16 countries from 1956 through 2000. However, out-of-sample
tests indicate that the relation has largely decreased over time. Also,
panel regressions, which notably include cross-sectional variance and
therefore are particularly relevant to market participants, suggest that the
relation is less sturdy, and consideration of excess as opposed to raw equity
price returns in time-series regressions indicates no relation. Finally,
alternative measures of central bank policy suggest a weaker and a diminished
correlation between monetary policy changes and long-run stock market
performance.
Keywords: Monetary policy, stock market returns
Full paper (147 KB PDF)
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