Investor sentiment and the stock market’s reaction to monetary policy

Stock market reaction to fed funds rate surprises: State dependence and the financial crisis

“…MM estimates are robust in the presence of a large number of outliers (see also Kurov, 2010). The main difference between the OLS and MM results is that in the latter the coefficient of FFR surprises during the crisis period becomes statistically significant thereby implying a more 12 Furthermore, the stock market itself may be reacting to the employment data releases (see e.g.…”

“…Following the majority of previous studies (see e.g. Kurov, 2010) we focused on models which include unexpected FFR changes only.…”

“…These studies typically identify a stronger stock market rebound when monetary expansion coincides with 'bad times' of negative economic growth, bear stock markets, and tightening credit market conditions (see e.g. Chen, 2007;Basistha and Kurov, 2008;Jansen and Tsai, 2010;Kurov, 2010). 14 Since the [2007][2008][2009] crisis was characterised by a credit crunch, an unprecedented deterioration in overall financial conditions and a major recession one would expect to find a strongly negative FFR shocks coefficient during that period.…”

“…Previous studies on the US stock market, have widely documented a positive reaction to expansionary monetary policy surprises and state dependence, with the aforementioned reaction being stronger during 'bad times' of negative economic growth and deteriorating financial conditions (see e.g. Basistha and Kurov, 2008;Kurov, 2010).…”

“…Nevertheless, the problem of endogeneity in the relationship between monetary policy and stock market performance should be less potent when higher frequency data, such as daily data, are used within an event study framework (see e.g. Bredin et al, 2009;Chen, 2007;Kurov, 2010).…”