Monetary Policy and the Stock Market: Theory and Empirical Evidence

Sellin, Peter

doi:10.1111/1467-6419.00147

Cited by 131 publications

(85 citation statements)

References 94 publications

(213 reference statements)

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“…Among the first we find are Geske and Roll (1983) and Kaul (1987). In these articles, the link in the causal chain between monetary policy and stock market returns is separately examined and estimated (see Sellin (2001) for a comprehensive survey of this literature). However, the error term in these individual estimations will be correlated and will therefore be more precisely identified using a joint estimation scheme.…”

Section: Empirical Evidencementioning

confidence: 99%

Identifying the interdependence between US monetary policy and the stock market

Bjørnland

Leitemo

2009

Journal of Monetary Economics

310

154

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (CEE 1999). We find great interdependence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 percent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock increasing stock prices by one percent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks.

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Section: Empirical Evidencementioning

confidence: 99%

Identifying the interdependence between US monetary policy and the stock market

Bjørnland

Leitemo

2009

Journal of Monetary Economics

310

154

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“…A two-stage regression model used by Maskay (2007) (2001) predicts or as the real activity theorists predicts? The results of this work suggest that the theory of real activity theorists dominates Sellin's (2001) theory. The results of the study support the view of the real activity hypothesis that a positive money supply shock raises stock prices and vice versa.…”

Section: Literature Reviewmentioning

confidence: 69%

“…In other meaning, there are competing theories on how money supply influences stock market values. These theories tested here are the ones developed by the real activity theorists and by Sellin (2001). Sellin (2001) argues that money supply will influence share values only if the change in money supply affect anticipation about future monetary policy.…”

Section: Theoretical Modelmentioning

confidence: 99%

“…These theories tested here are the ones developed by the real activity theorists and by Sellin (2001). Sellin (2001) argues that money supply will influence share values only if the change in money supply affect anticipation about future monetary policy. He claims that a positive money supply shock will cause people to predict contraction in monetary policy in the future.…”

Section: Theoretical Modelmentioning

confidence: 99%

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A Cointegration Analysis of Money Supply and Saudi Stock Price Index

Almutair¹

2015

IJEF

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This paper aims to use the Cointegration to analyze the relationship of money Supply and Saudi Stock Price Index (SSPI) using different measure of money supply M1 and M2 and different time series; annual data from 1985 until 2012 and monthly data from 2000 until 2013. The goal is to discover the relationship between SSPI and MS and to identify the long run as well as the short run causality using Vector Error Correction Model (VECM). The most important finding is the confirmation of long run relationship between M1 and SSPI as well as M2 and SSPI in both monthly and yearly data. The study has found that the long run causality is running from SSPI to M1 for annual data but not the other way around. This finding supports the Post-Keynesian theoretical approach which indicates the endogeneity of MS. Moreover, the result is consistent with efficient stock markets hypothesis since MS does not affect the SSPI in the long run. The implication of this result is that Saudi Arabian Monetary agency as well as commercial banks cannot affect the Saudi Stock prices through change in MS. This paper assures bidirectional short run causal relationship (or feedback effect) between SSPI and M1 by using annual data. The paper has not found neither long run nor short run causal relationship between SSPI and M2 with annual data. Furthermore, the study could not prove any long run or short run causality between M1 and SSPI or between M2 and SSPI through the use of monthly data.

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“…Recent empirical studies suggest that monetary policy focus during the crisis may have shifted from the price stabilisation objective towards financial stability (Baxa et al, 2013). 2 See Sellin (2001) for a thorough survey of the early studies investigating the link between monetary policy and stock prices.…”

Section: Introductionmentioning

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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Monetary Policy and the Stock Market: Theory and Empirical Evidence

Cited by 131 publications

References 94 publications

Identifying the interdependence between US monetary policy and the stock market

Identifying the interdependence between US monetary policy and the stock market

A Cointegration Analysis of Money Supply and Saudi Stock Price Index

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

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