Can the Fed Talk the Hind Legs Off the Stock Market?

European Banking Center Discussion Paper No. 2012-006

CentER Discussion Paper Series No. 2012-012

47 Pages Posted: 16 Jun 2011 Last revised: 9 Oct 2012

See all articles by Sylvester C. W. Eijffinger

Sylvester C. W. Eijffinger

Tilburg University (CentER) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Ronald Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group; TiasNimbas Business School

Louis Raes

Tilburg University; Tilburg University - European Banking Center

Multiple version iconThere are 3 versions of this paper

Date Written: October 9, 2012

Abstract

This paper analyzes the impact of US central bank communication on individual stock returns. We find a strong conditional effect of communication on stocks. The response of equities to central bank talk depends critically on the business cycle. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion the effect is weaker and on average negative. The impact of central bank communication on stock prices displays similar cross-sectional variation as central bank actions. Cyclical industries are found to be more sensitive to central bank communication. In our sample of S&P 500 companies we find that the stock prices of firms with low cash ows, low returns to assets or equity, very high or low debt levels, small size or using more trade credit to be affected more by central bank communication. Our evidence suggests that central bank communication by the FOMC has an impact on stocks and provides additional evidence for the demand and the credit channel.

Keywords: Monetary policy, Federal Reserve Communication, Credit channel, Business

JEL Classification: G14, E44, E52, E58

Suggested Citation

Eijffinger, Sylvester C. W. and Mahieu, Ronald J. and Raes, Louis, Can the Fed Talk the Hind Legs Off the Stock Market? (October 9, 2012). European Banking Center Discussion Paper No. 2012-006; CentER Discussion Paper Series No. 2012-012. Available at SSRN: https://ssrn.com/abstract=1865251 or http://dx.doi.org/10.2139/ssrn.1865251

Sylvester C. W. Eijffinger

Tilburg University (CentER) - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2411 (Phone)
+31 13 466 3042 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ronald J. Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2430 (Phone)
+31 13 466 3280 (Fax)

HOME PAGE: http://center.uvt.nl/staff/mahieu/

TiasNimbas Business School ( email )

Warandelaan 2
Tilburg, North-Brabant 5071HS
Netherlands

Louis Raes (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Tilburg University - European Banking Center ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

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