The effect of monetary policy shocks on stock prices accounting for endogeneity and omitted variable biases

Farka, Mira

doi:10.1016/j.rfe.2008.05.003

Cited by 60 publications

(73 citation statements)

References 35 publications

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“…More recently, Lucca and Moench (2014) examine excess returns on the S&P 500 Index one day prior to the FOMC announcement and find that there is strong evidence of a pre-announcement drift, where excess returns increase by 49 basis points before the announcement; these one-day returns make up about 80% of annual excess returns. Noteworthy is that on the day before the announcement demonstrates, they observe relatively lower trading volume and lower realized volatility, which is in line with "the calm before the storm argument" of Bomfim (2003) and Farka (2009). These results also hold for international markets and across the cross-section of US stocks.…”

Section: Literature Reviewsupporting

confidence: 59%

“…The impact of macroeconomic news on the volatility of stock markets has been investigated in a number of studies, including Lobo (2000Lobo ( , 2002, Bomfim (2003) who use daily data, and Farka (2009) who uses intraday data. These authors, using GARCH models, find macroeconomic news has a significant impact on the conditional volatility of returns.…”

Section: Literature Reviewmentioning

confidence: 99%

“…The general observation of many studies is that expansionary (contractionary) monetary policy decisions have positive (negative) impacts on stock markets (see, among others, Thorbecke, 1997;Rigobon and Sack, 2004;Bernanke and Kuttner, 2005;Basistha and Kurov, 2008;Kurov, 2010;and D'Amico and Farka, 2011), and that stock market volatility increases at the time of the announcement (see inter allii, Lobo, 2000Lobo, , 2002Bomfim, 2003;Farka, 2009;and Chuliá et al, 2010).…”

Section: Introductionmentioning

confidence: 99%

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When No News is Good News The Decrease in Investor Fear after the FOMC Announcement

2014

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This paper examines the impact of FOMC announcements on the intraday behavior of the VIX and VIX futures. We find that the VIX and the VIX futures start to decline immediately after the FOMC announcement, and this decline persists for about 45 minutes after the announcement. The VIX declines by about 3% on announcement days, whereas the nearest term VIX futures contract declines by about 1.40% around the announcement. We further note that the decline in the VIX and VIX futures is inversely related to the increase in realized volatility around the FOMC announcement. We show that on days with an FOMC announcement, a trading strategy, going short on the VIX futures at the start of the day and closing the position at the end of the same day, yields a return of about 10% p.a.

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Section: Literature Reviewsupporting

confidence: 59%

Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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When No News is Good News The Decrease in Investor Fear after the FOMC Announcement

2014

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“…They find that an increase in interest rate causes a decrease of the stock market on the announcement day of monetary policy shock. Farka (2009) examines the effect of Fed monetary policy on the stock returns and their volatilities by taking into account the endogeneity, omitted variable biases and potential asymmetries because of the type of policy shocks and policy actions. They report a decrease in stock returns following an increase in the policy rates.…”

Section: Literature Reviewmentioning

confidence: 99%

The Role of Monetary Policy Announcements on Turkish Banks' Stock Returns

Abdioğlu

Aytekin

2016

emaj

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“…A central bank can lower or raise benchmark rates to adjust the economy, which is similar to the interest rate. Several researchers [2][3][4][5][6][7] study how the Federal Reserve Board(FED), the central bank of the United States influences the markets both from the traditional finance research perspective [2,[8][9][10][11] and statistical physics [12,13]. Some studies report stock markets respond differently to different policy actions and types [2,5].…”

Section: Introductionmentioning

confidence: 99%

Impact of monetary policy changes on the Chinese monetary and stock markets

Tang

Luo

Xiong

et al. 2013

Physica A: Statistical Mechanics and its Applications

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The impact of monetary policy changes on the monetary market and stock market in China is investigated in this study. The changes of two major monetary policies, the interest rate and required reserve ratio, are analyzed in a study period covering seven years on the interbank monetary market and Shanghai stock market. We find that the monetary market is related to the macro economy trend and we also find that the monetary change surprises both of lowering and raising bring significant impacts to the two markets and the two markets respond to the changes differently. The results suggest that the impact of fluctuations is much larger for raising policy changes than lowering changes in the monetary market on policy announcing and effective dates. This is consistent with the ''sign effect'', i.e. bad news brings a greater impact than good news. By studying the event window of each policy change, we also find that the ''sign effect'' still exists before and after each change in the monetary market. A relatively larger fluctuation is observed before the event date, which indicates that the monetary market might have a certain ability to predict a potential monetary change, while it is kept secret by the central bank before official announcement. In the stock market, we investigate how the returns and spreads of the Shanghai stock market index respond to the monetary changes. Evidences suggest the stock market is influenced but in a different way than the monetary market. The climbing of returns after the event dates for the lowering policy agrees with the theory that lowering changes can provide a monetary supply to boost the market and drive the stock returns higher but with a delay of 2 to 3 trading days on average. While in the bear market, the lowering policy brings larger volatility to the market on average than the raising ones. These empirical findings are useful for policymakers to understand how monetary policy changes impact the monetary and stock markets especially in an emerging market like China where * Corresponding author at: Department of Physics, University of Fribourg, Chemin du Musée 3, CH-1700, Fribourg, Switzerland. Tel.: +86 13880206370.E-mail address: yong.tang@unifr.ch (Y. Tang).the economy is booming and the policy changes impact the markets as surprises by the central bank without a pre-decided schedule. This is totally different from previous studies on FED, which follows pre-decided schedules for monetary policy changes.

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The effect of monetary policy shocks on stock prices accounting for endogeneity and omitted variable biases

Cited by 60 publications

References 35 publications

When No News is Good News The Decrease in Investor Fear after the FOMC Announcement

When No News is Good News The Decrease in Investor Fear after the FOMC Announcement

The Role of Monetary Policy Announcements on Turkish Banks' Stock Returns

Impact of monetary policy changes on the Chinese monetary and stock markets

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