The Stock Market and the Fed

31 Pages Posted: 3 Apr 2008

See all articles by Fabrizio Mattesini

Fabrizio Mattesini

University of Rome Tor Vergata - Faculty of Economics

Leonardo Becchetti

University of Rome Tor Vergata - Faculty of Economics

Date Written: February 2008

Abstract

The paper investigates the reaction of the Federal Reserve to developments in the stock market. The issue is analyzed by first constructing an Index of Stock Price Misalignement in which the fundamental value of the stocks is computed on the basis of the discounted cash flow approach and by then including this index, among the regressors, into a forward looking Taylor rule. In accordance with the descriptive evidence, based mainly on the analysis of the FOMC meetings and public statements, our findings show that the Fed tends to lower the Fed funds rate when stock prices fall below their fundamental value, while there is no evidence of monetary stringency during episodes of exuberance in the stock market.

Suggested Citation

Mattesini, Fabrizio and Becchetti, Leonardo, The Stock Market and the Fed (February 2008). CEIS Working Paper No. 113, Available at SSRN: https://ssrn.com/abstract=1114861 or http://dx.doi.org/10.2139/ssrn.1114861

Fabrizio Mattesini (Contact Author)

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Leonardo Becchetti

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia, 2
I-00133 Rome
Italy

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