Stock Returns and Monetary Policy: Are There Any Ties?

CIRPEE Working Paper 10-26

52 Pages Posted: 9 Sep 2010

See all articles by Hafedh Bouakez

Hafedh Bouakez

HEC Montréal

Badye Essid

HEC Montreal - Institute of Applied Economics

Michel Normandin

HEC Montreal - Institute of Applied Economics

Date Written: September 8, 2010

Abstract

This paper empirically investigates the following three questions: (i) Do stock returns respond to monetary policy shocks? (ii) Do stock returns alter the transmission mechanism of monetary policy? and (iii) Does monetary policy systematically react to stock returns? Existing research based on event studies and Structural Vector Auto-Regressions (SVAR) documents that stock returns increase significantly following an unanticipated monetary policy expansion. However, this literature did not explore whether or not stock returns matter for the choice of monetary policy or its propagation mechanism. In this paper, we use a SVAR that relaxes the restrictions commonly imposed in earlier studies and identify monetary policy shocks by exploiting the conditional heteroscedasticity of the structural innovations. Applying this method to U.S. data, we reach a surprising and puzzling conclusion: the answers to the three questions above are No, No, and No!

Keywords: Conditional Heteroscedasticity, Identification, Monetary Policy, Shock Return, Structural Vector Autoregression

JEL Classification: C32, E44, E52, G12

Suggested Citation

Bouakez, Hafedh and Essid, Badye and Normandin, Michel, Stock Returns and Monetary Policy: Are There Any Ties? (September 8, 2010). CIRPEE Working Paper 10-26. Available at SSRN: https://ssrn.com/abstract=1674049 or http://dx.doi.org/10.2139/ssrn.1674049

Hafedh Bouakez

HEC Montréal ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada
1-514-340-7003 (Phone)
1-514-340-6469 (Fax)

Badye Essid

HEC Montreal - Institute of Applied Economics

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

Michel Normandin (Contact Author)

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

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