UK Stock Returns and the Impact of Domestic Monetary Policy Shocks
University College Dublin
University of Manchester - Manchester Business School
City University London - Sir John Cass Business School
Central Bank & Financial Services Authority of Ireland
Journal of Business Finance & Accounting, Vol. 34, No. 5-6, pp. 872-888, June/July 2007
We investigate the influence of changes in UK monetary policy on UK stock returns and the possible reasons behind such a response. Firstly, we conduct an event study to assess the impact of unexpected changes in monetary policy on aggregate and sectoral stock returns. The decomposition of unexpected changes in the policy rate is based on futures markets data. Secondly, using a variance decomposition in the spirit of Campbell (1991) we attempt to identity the channels behind the response of stock returns to monetary policy surprises. The variance decomposition results indicate that the monetary policy shock leads to a persistent negative response in terms of future excess returns for a number of sectors.
Number of Pages in PDF File: 17
JEL Classification: G12, E44Accepted Paper Series
Date posted: July 11, 2007
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