Variations in effects of monetary policy on stock market returns in the past four decades

Abstract

Stock prices are sensitive to monetary policy. However, the sensitivities are not stable over time. A drastic change in monetary policy can alter effects of monetary policy on stock returns. This study finds that stock prices can be affected by current changes, unexpected changes, or near‐future changes in the funds/discount rates, due to different policy goals or targets in different periods. Specifically, this study provides empirical evidence that monetary policy influences the stock market in different ways in the 1960s, the 1970s, the Volcker and Greenspan periods.

Dynamic linkages between monetary policy and the stock market

“…Moreover, these effects were more pronounced in the Burns monetary policy regime than in the Greenspan regime suggesting that distinct monetary regimes, and especially during the Volcker and Greenspan eras (due to higher policy transparency), have exerted differing impacts on the stock market (and other variables, e.g., Clarida et al 2000). These findings are consistent with past evidence which shows these effects, at least in the short run (e.g., Thorbecke 1997;Lee 2003;Ehrmann andFratzscher 2004, andHe 2006 to name a few). Finally, Smirlock and Yawitz (1985) and Guo (2004) also found that stock prices negatively and significantly responded to unexpected changes in the federal funds rate target, but not to expected ones.…”

The impact of monetary policy decisions on stock returns: Evidence from Thailand

“…The unexpected change in the repurchase rate has a negative (positive) effect on stock returns when it is considered as good (bad) news. Fifth, using the time-series analysis framework of He (2006), we find that at the market level the change in the repurchase rate has no effect on stock returns. The results also reveal that the unexpected change in the repurchase rate cannot explain the stock return variation.…”

“…Following Bernanke and Kuttner (2005) and He (2006), we also use a time-series technique framework to test the stock market's response to monetary policy decisions using the monthly data. The basis-point change in the repurchase rate is used as a proxy for the change in the policy interest rate.…”

“…Furthermore, we test whether the effect of repurchase rate changes on stock prices is asymmetric. To test the effect of monetary policy on equity prices, we primarily adopt two approaches used by Bernanke and Kuttner (2005) and He (2006). We measure the stock market's response to the Bank of Thailand's repurchase rate announcement, used as a proxy for a monetary policy decision, during 2003-2009, at both aggregate (market) and disaggregate (firm) levels.…”

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

“…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].…”