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Nonlinear effects of monetary policy on stock returns in a smooth transition autoregressive model

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  • Hsu, Kuang-Chung
  • Chiang, Hui-Chu

Abstract

This paper employs smooth transition autoregressive (STAR) models to investigate the nonlinear effect of monetary policy on stock returns. The change in the Federal funds rate is used as an endogenous measure of monetary policy, and the growth rate of industrial production is also considered in the model. Our results show that the relationship between the monetary policy and excess returns on stock prices is positive and nonlinear. A decrease in the Federal funds rate causes a larger increase in excess returns if excess stock returns are located in the extreme low excess returns regime.

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  • Hsu, Kuang-Chung & Chiang, Hui-Chu, 2011. "Nonlinear effects of monetary policy on stock returns in a smooth transition autoregressive model," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(4), pages 339-349.
    • Handle: RePEc:eee:quaeco:v:51:y:2011:i:4:p:339-349
    DOI: 10.1016/j.qref.2011.08.003
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    Cited by:

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    More about this item

    Keywords

    Monetary policy; Stock returns; STAR model;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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