Monetary Policy Shocks and Stock Returns: Evidence from the British Market
University of East Anglia
University of Glasgow - Department of Economics
University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)
University of Stirling - Department of Economics
October 13, 2009
Financial Markets and Portfolio Management, Vol. 23, No. 4, pp. 401-410, 2009
This paper examines the impact of anticipated and unanticipated interest rate changes on aggregate and sectoral stock returns in the United Kingdom. The monetary policy shock is generated from the change in the 3-month sterling LIBOR futures contract. Results from time-series and panel analysis indicate an important structural break in the relationship between stock returns and monetary policy shifts. Specifically, whereas before the credit crunch, the stock market response to both expected and unexpected interest rate changes is negative and significant; the relationship becomes positive during the credit crisis. The latter finding highlights the inability, so far, of monetary policymakers to reverse, via interest rate cuts, the negative trend observed in stock prices since the onset of the credit crisis.
Keywords: Asset prices, Monetary policy, Panel data
JEL Classification: C33, E44, E52, G13Accepted Paper Series
Date posted: June 19, 2010
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