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The effect of monetary policy on monthly and quarterly stock market returns: cross-country evidence and sensitivity analyses

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  • J. Benson Durham

Abstract

Several studies report an empirical link between changes in monetary policy and short- as well as long-run stock market performance in the United States. Such findings are germane both to the study of market anomalies and to monetary policy transmission mechanisms. Previous univariate time-series results on long-run data, which use the discount rate as the main policy indicator, seem robust to alternative specifications of stock price returns given data on 16 countries from 1956 through 2000. However, out-of-sample tests indicate that the relation has largely decreased over time. Also, panel regressions, which notably include cross-sectional variance and therefore are particularly relevant to market participants, suggest that the relation is less sturdy, and consideration of excess as opposed to raw equity price returns in time-series regressions indicates no relation. Finally, alternative measures of central bank policy suggest a weaker and a diminished correlation between monetary policy changes and long-run stock market performance.

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  • J. Benson Durham, 2001. "The effect of monetary policy on monthly and quarterly stock market returns: cross-country evidence and sensitivity analyses," Finance and Economics Discussion Series 2001-42, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2001-42
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    1. Ellis B. Heath & Seth J. Kopchak, 2015. "The Response of the Mexican Equity Market to US Monetary Surprises," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(2), pages 87-111, August.
    2. Don Bredin & Stuart Hyde & Dirk Nitzsche & Gerard O'Reilly, 2009. "European monetary policy surprises: the aggregate and sectoral stock market response," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 156-171.
    3. Ahmet UGUR & Canan SANCAR & Yusuf Ekrem AKBAŞ, 2016. "Effectiveness of monetary policies in OECD countries," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(609), W), pages 75-88, Winter.
    4. Wongswan, Jon, 2009. "The response of global equity indexes to U.S. monetary policy announcements," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 344-365, March.
    5. Oreste Napolitano, 2009. "Is the impact of the ECB Monetary Policy on EMU stock market returns asymmetric?," STUDI ECONOMICI, FrancoAngeli Editore, vol. 0(97), pages 145-180.
    6. Ahmet UGUR & Canan SANCAR & Yusuf Ekrem AKBAŞ, 2016. "Effectiveness of monetary policies in OECD countries," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(609), W), pages 75-88, Winter.
    7. J. Benson Durham, 2003. "Does monetary policy affect stock prices and Treasury yields? An error correction and simultaneous equation approach," Finance and Economics Discussion Series 2003-10, Board of Governors of the Federal Reserve System (U.S.).
    8. Ryan Compton & Syeed Khan, 2010. "An examination of the stability of short-run Canadian stock predictability," Economics Bulletin, AccessEcon, vol. 30(2), pages 1293-1306.
    9. Don Bredin & Caroline Gavin & Gerard O Reilly, 2003. "The Influence of Domestic and International Interest Rates on the ISEQ," The Economic and Social Review, Economic and Social Studies, vol. 34(3), pages 249-265.
    10. Rapach, David E. & Wohar, Mark E. & Rangvid, Jesper, 2005. "Macro variables and international stock return predictability," International Journal of Forecasting, Elsevier, vol. 21(1), pages 137-166.
    11. Tang, Yong & Luo, Yong & Xiong, Jie & Zhao, Fei & Zhang, Yi-Cheng, 2013. "Impact of monetary policy changes on the Chinese monetary and stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4435-4449.
    12. Heimonen, Kari, 2010. "Money and equity returns in the Euro area," Global Finance Journal, Elsevier, vol. 21(2), pages 152-169.
    13. Stylianos X. Koufadakis, 2015. "Asymmetries on Closed End Country Funds Premium and Monetary Policy Announcements: An Approach Trough the Perspective of Foreign Countries," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 65(3-4), pages 29-65, july-Dece.
    14. Michael P. Hughes & Karl Rogers, 2016. "Zero Lower Bound Monetary Policy’s Effect on Financial Asset’s Correlations," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(2), pages 151-170, May.

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    Monetary policy; Stock market;

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