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The reaction of international stock markets to Federal Reserve policy

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  • Jing Wang
  • Xiaoneng Zhu

Abstract

This paper investigates how changes in Federal Reserve policy impact international stock returns, with the three objectives of measuring the reaction of international stock markets, understanding the transmission channels of that reaction, and explaining the economic sources of that reaction. We find that unanticipated Federal Reserve policy actions exert a significant and robust influence on international stock prices. However, the influence of unanticipated monetary policy actions is not strong enough to change the correlation structure of international equity returns. We also find that international stock return co-movements play an important role in the transmission of monetary policy. Finally, the variance decomposition analysis indicates that the effects of monetary policy surprises on future excess returns or dividend returns account for the largest portion of the equity price response. Copyright Swiss Society for Financial Market Research 2013

Suggested Citation

  • Jing Wang & Xiaoneng Zhu, 2013. "The reaction of international stock markets to Federal Reserve policy," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(1), pages 1-30, March.
    • Handle: RePEc:kap:fmktpm:v:27:y:2013:i:1:p:1-30
    DOI: 10.1007/s11408-012-0204-3
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    Cited by:

    1. Yen-Hsien Lee, 2014. "An international analysis of REITs and stock portfolio management based on dynamic conditional correlation models," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(2), pages 165-180, May.
    2. Fausch, Jürg & Sigonius, Markus, 2018. "The impact of ECB monetary policy surprises on the German stock market," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 46-63.
    3. Dong, Weijia & Lien, Donald & Lv, Xin & Tan, Chaosheng, 2021. "The cross-border impacts of China’s official rate shocks on stock returns of Chinese concepts shares listed on U.S. market," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1305-1322.

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    More about this item

    Keywords

    Unanticipated monetary policy; Return comovements; Stock returns; Variance decomposition; E52; G12; G15;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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