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Unconventional monetary policy and the stock market

Author

Listed:
  • Sajjadur Rahman

    (Texas A & M University - San Antonio)

  • Apostolos Serletis

    (University of Calgary)

Abstract

We use weekly changes in the size of the Federal Reserve’s balance sheet as a policy tool that has largely been ignored in the literature to investigate the relationship between the unconventional monetary policy and stock market returns when the federal funds rate reaches the zero lower bound. Our empirical framework is based on a structural VAR that is identified using heteroscedasticity in weekly data on the components of the Fed’s balance sheet. We find evidence that the unconventional expansionary monetary policy is effective in stimulating the stock market, as it has positive and statistically significant effects on stock returns. In extending our analysis to disaggregate returns, our findings suggest heterogenous and asymmetric responses of disaggregate returns to an unconventional policy shock.

Suggested Citation

  • Sajjadur Rahman & Apostolos Serletis, 2023. "Unconventional monetary policy and the stock market," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(3), pages 707-722, September.
    • Handle: RePEc:spr:jecfin:v:47:y:2023:i:3:d:10.1007_s12197-023-09624-z
    DOI: 10.1007/s12197-023-09624-z
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Unconventional monetary policy; Structural VAR model; Heteroscedasticity;
    All these keywords.

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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