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Stock returns and monetary policy stance

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  • Jang, Bosung
  • So, Inhwan

Abstract

This paper investigates the structural relationships between monetary policy and stock returns. We build an asset pricing model incorporating a standard Taylor rule into a consumption-CAPM framework. Our model quantitatively explains the negative risk premium of expansionary monetary policy. As monetary policy plays a role of insurance, (expansionary) monetary policy beta is negatively related to covariances of returns with output gap and inflation theoretically and empirically. In addition, while systematic responses mainly account for the negative risk premium, pure monetary policy shocks have little influence under plausible calibrations. We also provide theoretical predictions on how the slope of the Phillips curve and the response parameters of monetary policy affect the cross-section of returns.

Suggested Citation

  • Jang, Bosung & So, Inhwan, 2024. "Stock returns and monetary policy stance," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 851-869.
    • Handle: RePEc:eee:reveco:v:92:y:2024:i:c:p:851-869
    DOI: 10.1016/j.iref.2024.02.062
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    More about this item

    Keywords

    Monetary policy stance; r-star; Cross-sectional asset pricing; Monetary policy exposure;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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