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Do Monetary Policy Shocks Have Asymmetric Effects on Stock Market?

Author

Listed:
  • Victor Song

    (Simon Fraser University)

  • Libo Xu

    (Lakehead University)

Abstract

This paper investigates the relationship between monetary policy and the stock market using weekly U.S. data, following the work of Serletis and Istiak (2016). In doing so, vector autoregression (VAR) is adopted, and we allow rich interdependence between monetary policy and the stock market. The model is identified by exploiting the conditional heteroscedasticity of the reduced form VAR error terms. Two structural shocks – money demand and supply shocks – are extracted. The findings show a positive money demand shock, which increases the interest rate, decreases the stock price. On the other hand, a positive money supply shock does not significantly increase the stock price. We find that the impulse responses of stock prices are symmetric in positive and negative money supply shocks. It follows that money supply shocks do not have asymmetric effects on the stock market in general.

Suggested Citation

  • Victor Song & Libo Xu, 2023. "Do Monetary Policy Shocks Have Asymmetric Effects on Stock Market?," Open Economies Review, Springer, vol. 34(5), pages 1063-1078, November.
    • Handle: RePEc:kap:openec:v:34:y:2023:i:5:d:10.1007_s11079-022-09710-5
    DOI: 10.1007/s11079-022-09710-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary policy; Stock price; VAR; GARCH;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • 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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