What Determines the Stock Market's Reaction to Monetary Policy Statements?

43 Pages Posted: 8 Jun 2012

See all articles by Alexander Kurov

Alexander Kurov

West Virginia University - College of Business & Economics

Date Written: June 7, 2012

Abstract

We find that information communicated through monetary policy statements has important business cycle dependent implications for stock prices. For example, during periods of economic expansion, stocks tend to respond negatively to announcements of higher rates ahead. In recessions, however, we find a strong positive reaction of stocks to seemingly similar signals of future monetary tightening. We provide evidence that the state dependence in the stock market’s response is explained by information about the expected equity premium and future corporate cash flows contained in monetary policy statements. We also show state dependence in the average stock returns on days of scheduled FOMC meetings and in the impact of monetary policy statements on stock and bond return volatility.

Keywords: Monetary policy, FOMC statements, Stock market, Business cycle

JEL Classification: E44, E52, E58, G14

Suggested Citation

Kurov, Alexander, What Determines the Stock Market's Reaction to Monetary Policy Statements? (June 7, 2012). Available at SSRN: https://ssrn.com/abstract=2079651 or http://dx.doi.org/10.2139/ssrn.2079651

Alexander Kurov (Contact Author)

West Virginia University - College of Business & Economics ( email )

P.O. Box 6025
Morgantown, WV 26506
United States

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