Monetary Shocks, Equity Returns and Volatility - A Firm-Level Panel Data Analysis
28 Pages Posted: 9 Aug 2015
Date Written: 2015
Abstract
This paper studies the impact of monetary policy shocks on equity returns and their volatility among nine industries and their affiliated firms in the U.S. We use an extension of the traditional Capital Asset Pricing Model as the analytical framework and approximate policy shocks with the unexpected component of the federal funds rate. Data on the characteristics of firms and industries are obtained from Compustat and CRSP, covering a sample period from 1987 to 2009. Our results clearly show that responses to policy shocks vary by industry and across firms. Furthermore, credit availability matters in certain industries, and small, financially constrained, and bank-dependent firms are found to be more vulnerable to unexpected federal funds rate shocks.
Keywords: Monetary Shock; Firm Characteristics; Taylor Rule; Markov Switching; GARCH; Financial Accelerator Model
JEL Classification: E44, G1
Suggested Citation: Suggested Citation