Why Does the Fed React to the Stock Market Changes?: A Covariance Decomposition
Analysis

TOBB University of Economics and Technology Department of Economics Working Paper No. 09-05

10 Pages Posted: 2 May 2011  

Bedri Kamil Onur Tas

TOBB University of Economics and Technology - Department of Economics

Date Written: October 1, 2009

Abstract

This paper investigates the factors that affect the covariance between the federal funds rate and stock returns. I estimate a VAR system and implement covariance decomposition analysis. Most of the covariance between the federal funds rate and stock returns is affected by changes in stock market and output. These results conclude that the Fed is actually targeting stock returns directly.

Keywords: Monetary Policy, Stock Returns, Covariance Decomposion

JEL Classification: E44, E52, E58; E61, C32

Suggested Citation

Tas, Bedri Kamil Onur, Why Does the Fed React to the Stock Market Changes?: A Covariance Decomposition Analysis (October 1, 2009). TOBB University of Economics and Technology Department of Economics Working Paper No. 09-05. Available at SSRN: https://ssrn.com/abstract=1827842 or http://dx.doi.org/10.2139/ssrn.1827842

Bedri Kamil Onur Tas (Contact Author)

TOBB University of Economics and Technology - Department of Economics ( email )

Sogutozu Cad. No:43 Sogutozu
Ankara, 06560
Turkey

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