Stock Market Bubbles and Monetary Policy Effectiveness

Posted: 18 Apr 2016 Last revised: 1 Dec 2021

See all articles by Olga Fullana

Olga Fullana

University of Valencia; Universitat de València

Javier Ruiz

University of Castilla-La Mancha - University of Castilla-La Mancha (Cuenca Campus)

David Toscano

University of Huelva

Date Written: January 9, 2020

Abstract

In this paper, we provide evidence on the response of stock market returns to monetary policy shocks but condition the analysis on both the direction of monetary policy surprises and business conditions. We follow a two-step approach: First, we use an structural vector autoregressive (SVAR) model to identify a proxy variable of monetary policy shocks; then, we apply a conditional regression to contemporary stock market returns and these monetary policy shocks to extract the implicit relationship between these variables in different scenarios. Our results show that monetary policy does not impact on stock market returns in a significant form in the scenario defined by positive shocks and expansion periods, i.e. the lower effectiveness of restrictive monetary policy shocks coincides with the phase of the business cycle in which bubbles arise.

Keywords: Conditional regressions, structural auto-regressive vector (SVAR), exogenous monetary policy shocks, sign-dependent responses, state-dependent responses

JEL Classification: E43, E44, E52, E58, G12

Suggested Citation

Fullana, Olga and Ruiz, Javier and Toscano, David, Stock Market Bubbles and Monetary Policy Effectiveness (January 9, 2020). Available at SSRN: https://ssrn.com/abstract=2765710 or http://dx.doi.org/10.2139/ssrn.2765710

Olga Fullana

University of Valencia ( email )

Universitat de València ( email )

València, Valencia
Spain

Javier Ruiz

University of Castilla-La Mancha - University of Castilla-La Mancha (Cuenca Campus) ( email )

Cuenca
Spain

David Toscano (Contact Author)

University of Huelva ( email )

Fac. CC. Empresariales
Plaza La Merced
Huelva, Huelva 21002
Spain
959217878 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
1,602
PlumX Metrics