Macroeconomic Cycles and the Stock Market's Reaction to Monetary Policy

Basistha, Arabinda; Kurov, Alexander

doi:10.2139/ssrn.1092246

Cited by 79 publications

(118 citation statements)

References 41 publications

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“…Furthermore, excluding unscheduled FOMC meetings in Table 3 Panel C, leads to smaller and statistically insignificant estimates of the pre-crisis impact of FFR surprises and major deterioration in the fit of the model. This finding is consistent with previous evidence by Bernanke and Kuttner (2005) and Basistha and Kurov (2008) for the pre-crisis period.…”

Section: Figures 4-5 Here]supporting

confidence: 94%

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

Kontonikas

MacDonald

Saggu

2013

Journal of Banking & Finance

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Section: Figures 4-5 Here]supporting

confidence: 94%

“…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).…”

Section: Introductionmentioning

confidence: 99%

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

Kontonikas

MacDonald

Saggu

2013

Journal of Banking & Finance

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“…This suggests that the markets were more sensitive to unexpected movements in the Fed's target rate during the period of rising interest rate cycle. This is consistent with Basistha and Kurov (2008) who report stronger U.S. stock market responses to unexpected rate changes of the Fed during the periods of recessions and tight credit conditions. However, there is no clear evidence for such sample specific market responses to the ECB's news.…”

Section: The Ecb's Target Interest Rate Newssupporting

confidence: 90%

The spillover effects of target interest rate news from the U.S. Fed and the European Central Bank on the Asia-Pacific stock markets

Kim

Nguyen

2009

Journal of International Financial Markets, Institutions and Mo

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This paper provides comprehensive evidence on the spillover effects of the U.S. Fed's and the European Central Bank (ECB)'s target interest rate news on the market returns and return volatilities of twelve stock markets in the Asia-Pacific over the period [1999][2000][2001][2002][2003][2004][2005][2006]. The news spillover effects on the returns are generally consistent with the literature where a majority of stock markets shows significant negative returns in response to unexpected rate rises. Whilst the results of the speed of adjustment for the Fed's news are mixed across the markets, the ECB news was absorbed slowly, in general. The return volatilities were higher in response to the interest rate news from both sources. In addition, both the Fed and the ECB news elicited tardy or persisting volatility responses. These findings have important implications for all levels of market participants in the Asia Pacific stock markets. JEL classification: E44; G14; G15Keywords: Target interest rate news; Spillover effects; U.S. Fed; ECB Acknowledgement: We would like to thank Stijn Claessens and an anonymous referee for valuable comments and suggestions that greatly enhanced this paper. The remaining errors, if any, are our own.

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Section: Introductionmentioning

confidence: 98%

“…The response is stronger for smaller stocks, consistent with the "sizeeffect" of monetary policy actions (Thorbecke, 1997;Ehrmann and Fratzscher, 2004;Jansen and Tsai, 2010; Kontonikas and Kostakis, 2013; Maio, 2014). Furthermore, the monetary policy effect on stock prices is found to be stronger during bad economic times and in bear markets (Basistha and Kurov, 2008;Jansen and Tsai, 2010).Most of the existing empirical studies do not directly address the simultaneity problem, which stems from the potential response of monetary policy to stock market developments, and simply focus on the reaction of stock prices to monetary policy shocks. In 4 two influential studies, however, Rigobon and Sack (2003; show that the relationship between the US monetary policy and stock valuation is bi-directional.…”

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confidence: 99%

Monetary policy and stock valuation: structural VAR identification and size effects

Kontonikas

Zekaite

2018

Quantitative Finance

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This paper examines the relationship between the US monetary policy and stock valuation using a structural VAR framework that allows for the simultaneous interaction between the federal funds rate and stock market developments based on the assumption of long-run monetary neutrality. The results confirm a strong, negative and significant monetary policy tightening effect on real stock prices. Furthermore, we provide evidence consistent with a delayed response of small stocks to monetary policy shocks relative to large stocks. § Corresponding author. Essex Business School, Finance Subject Group, University of Essex, Colchester, CO4 3SQ, UK, a.kontonikas@essex.ac.uk.‡ Adam Smith Business School, University of Glasgow, Glasgow, G12 8QQ, UK, z.zekaite.1@research.gla.ac.uk. We would also like to thank Tom Doan for providing the estimation code and helpful advice. 2 IntroductionFinance practitioners and academic researchers generally agree that monetary policy shifts have strong effects on financial markets and that there may be the role for asset prices in the monetary policy reaction function. 1 The empirical literature investigating the relationship between monetary policy and stock valuation in the United States goes back to 1970s. 2 In these early studies it is acknowledged that causality may run in both directions (Cooper, 1974;Smirlock and Yawitz, 1985). Given that stock prices, amongst other asset prices, feature in the monetary policy transmission mechanism, it is important to gain a thorough understanding of how monetary policy interacts with stock market developments (Mishkin, 2001;Bjornland and Jacobsen, 2013). This paper re-examines this relationship at both the market and portfolio level using data on portfolios formed on the basis of firm's size (market value). The empirical framework that we use allows for the short-run interaction between monetary policy and real stock price developments, assuming long-run monetary neutrality.Monetary policy may affect stock prices through its impact on the expected future net cash flows and the discount rate; the latter being equal to the sum of a risk-free interest rate and a risk premium (Smirlock and Yawitz, 1985; Kontonikas and Kostakis, 2013). According to the traditional interest rate channel, monetary policy tightening lowers the demand for loans due to higher costs of borrowing. In turn, consumption and investment spending decline leading to lower expected future net cash flows and, consequently, to lower current stock prices (Bernanke and Gertler, 1995;Ehrmann and Fratzscher, 2004). The credit channel operates via the impact of monetary policy on the external finance premium (Gertler and Gilchrist, 1994; Gertler, 1995, Kiyotaki and Moore, 1997 3 response to monetary policy tightening, the equity premium on stocks goes up either due to higher perceived riskiness of firms or increased risk aversion among investors. Consequently, current stock prices decline.Smaller firms are typically less immune to adverse conditions stemming from tighter monetary co...

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Macroeconomic Cycles and the Stock Market's Reaction to Monetary Policy

Cited by 79 publications

References 41 publications

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

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

The spillover effects of target interest rate news from the U.S. Fed and the European Central Bank on the Asia-Pacific stock markets

Monetary policy and stock valuation: structural VAR identification and size effects

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