The time varying effect of monetary policy on stock returns

Jansen, Dennis W.; Zervou, Anastasia

doi:10.1016/j.econlet.2017.08.022

Cited by 24 publications

(7 citation statements)

References 10 publications

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“…This behavior would have two empirical implications. First, there is a negative relationship between a change in policy uncertainty and stock returns; second, the parametric relation between a change in policy uncertainty and stock returns may entail some time lags (Hollmayr and Matthes, 2015; Jansen and Zervou, 2017; Olivei and Tenreyro, 2007).…”

Section: Literature Reviews and Economic Rationalesmentioning

confidence: 99%

US policy uncertainty and stock returns: evidence in the US and its spillovers to the European Union, China and Japan

Chiang

2020

JRF

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Purpose Recent empirical studies by Antonakakis, Chatziantoniou and Filis (2013), Brogaard and Detzel (2015) and Christou et al. (2017) present evidence, which supports the notion that a rise in economic policy uncertainty (EPU) will lead to a decline in stock prices. The purpose of this paper is to examine US categorical policy uncertainty on stock returns while controlling for implied volatility and downside risk. In addition to the domestic impacts of policy uncertainty, this paper also presents evidence that changes in US policy uncertainty promptly propagates to the global stock markets. Design/methodology/approach This study uses a GED-GARCH (1, 1) model to estimate changes of uncertainties in US monetary, fiscal and trade policies on stock returns for the sample period of January 1990–December 2018. Robustness test is conducted by using different set of data and modeling techniques. Findings This paper contributes to the literature in several aspects. First, testing of US aggregate data while controlling for downside risk and implied volatility, consistently, shows that responses of stock prices to US policy uncertainty changes, not only display a negative effect in the current period but also have at least a one-month time-lag. The evidence supports the uncertainty premium hypothesis. Second, extending the test to global data reveals that US policy uncertainty changes have a negative impact on markets in Europe, China and Japan. Third, testing the data in sectoral stock markets mainly displays statistically significant results with a negative sign. Fourth, the evidence consistently shows that changes in policy uncertainty present an inverse relation to the stock returns, regardless of whether uncertainty is moving upward or downward. Research limitations/implications The current research is limited to the markets in the USA, eurozone, China and Japan. This study can be extended to additional countries, such as emerging markets. Practical implications This paper provides a model that uses categorical policy uncertainty approach to explain stock price changes. The parametric estimates provide insightful information in advising investors for making portfolio decision. Social implications The estimated coefficients of changes in monetary policy uncertainty, fiscal policy uncertainty and trade policy uncertainty are informative in assisting policymakers to formulate effective financial policies. Originality/value This study extends the existing risk premium model in several directions. First, it separates the financial risk factors from the EPU innovations; second, instead of using EPU, this study investigates the effects from monetary policy, fiscal policy and trade policy uncertainties; third, in additional to an examination of the effects of US categorical policy uncertainties on its own markets, this study also investigates the spillover effects to global major markets; fourth, besides the aggregate stock markets, this study estimates the effects of US policy uncertainty innovations on the sectoral stock returns.

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Section: Literature Reviews and Economic Rationalesmentioning

confidence: 99%

US policy uncertainty and stock returns: evidence in the US and its spillovers to the European Union, China and Japan

Chiang

2020

JRF

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“…The yield spread is expected to be positive since a positively sloped yield curve tends to be good for business, thus pushing stock prices higher; conversely for an inverted yield curve which is normally taken to be an indicator of recessions. Jansen and Zervou (2017) provide time-varying effects of surprise increases on the Federal Funds rate on US stock returns. The aggregate stock market is expected to have positive effects and close to 1 coefficient if firms respond in the same way to the overall market.…”

Section: Empirical Methodologiesmentioning

confidence: 99%

Stock returns, oil prices and leverage: evidence from US firms

Amin

Mollick

2021

IJMF

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PurposeThis paper aims to investigate how the relation between stock returns of US firms and West Texas Intermediate (WTI) oil prices is affected by leverage from 1990 to 2020.Design/methodology/approachThis paper examines how the relationship between stock returns of US firms and WTI oil prices is affected by leverage from 1990 to 2020 using a fixed-effect model estimation framework.FindingsResults from the fixed-effect regression models suggest that leverage effects on stock returns are pervasive both in aggregate and cross-industry levels, while the mining industry is more sensitive. In addition to the positive oil price effects attenuated by leverage at the aggregate level, the authors observe stronger marginal effects of leverage only for the mining sector. Being more exposed to commodity prices, the positive effects of oil prices on stock returns in the mining sector are offset by large debt ratios. Asymmetries, effects of debt maturity structure and implications are also discussed.Research limitations/implicationsThis study is grounded on the contemporary cash flow claim of leverage NOT on the long-run effect of leverage considering cash flow constraints. The oil price increase is assumed to represent an advancement of the overall economy. This study does not capture the oil prices response to some other economic forces and vice-versa.Practical implicationsMining companies should therefore reduce the stock of debt with respect to their assets to make possible the “pass-through” from oil prices to the stock market.Originality/valuePreviously undocumented and the authors show that leverage reduces the total effect of oil prices on stock returns, consistent with the hypothesis. Asymmetric and debt maturity structures effects are also discussed.

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“…For Barsky (1989) the positive relationship may be a function of varying risk premium. Few other empirical studies have also suggested that there is no relationship between monetary policy aggregates and the stock market performance (See for example: Jasen & Zervou, 2017;Floro, 2017). In Egypt, Sourial (2000) tested the relationship between the Egyptian stock market returns and monetary policy using Bayesian VAR models from June 1992 to April 2000.…”

Section: Literature Reviewmentioning

confidence: 99%

Dynamic Relationship between Interest Rate and Tourism Stock Performance: Empirical Evidence from Egyptian Exchange

Ahmed¹

2019

International Journal of Heritage, Tourism and Hospitality

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Tourism industry plays a significant role in the economic development in Egypt. Identifying the effects of macroeconomic variables on the performance of tourism companies is important and of great interest to decision-makers and investors. The main purpose of this study is to investigate the dynamic relation between interest rate and the stock performance of tourism companies, as measured by the stock price, in the Egyptian Exchange (EGX). The linear Granger causality test, Cointegration analysis and Error Correction Model (ECM) are employed to establish the relationship between the tested variables. Findings show that a unidirectional causal relationship exists between the variables evaluated from interest rate to tourism stock price. A positive longrun cointegration between the tested variables is observed and a rise in interest rate by 1% triggers stock price rise of 26.8%. The coefficient of error correction indicates that 0.03% of the deviation of stock price is adjusted in the short-run. The study ends with implications for decision-makers, financial executives in tourism companies and researchers in the field.

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The time varying effect of monetary policy on stock returns

Cited by 24 publications

References 10 publications

US policy uncertainty and stock returns: evidence in the US and its spillovers to the European Union, China and Japan

US policy uncertainty and stock returns: evidence in the US and its spillovers to the European Union, China and Japan

Stock returns, oil prices and leverage: evidence from US firms

Dynamic Relationship between Interest Rate and Tourism Stock Performance: Empirical Evidence from Egyptian Exchange

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