What Determines the Stock Market's Reaction to Monetary Policy Statements?
43 Pages Posted: 8 Jun 2012
Date Written: June 7, 2012
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: Suggested Citation