Monetary Policy and the Cross-Section of Security Returns

Posted: 1 Feb 2001

See all articles by Gerald R. Jensen

Gerald R. Jensen

Northern Illinois University

Jeffrey M. Mercer

Texas Tech University - Department of Finance

Abstract

Ample evidence shows that size and book-to-market equity explain significant cross-sectional variation in stock returns, whereas betas contribution is minimal or nonexistent. Recent studies also demonstrate that proxies for monetary stringency increase the explained variation in stock returns. We reexamine a three-factor model that includes beta, size, and book-to-market equity, while allowing monetary conditions to influence the relations between these risk factors and average stock returns. We find that ex-ante proxies for monetary stringency significantly influence the relations between stock returns and all three risk factors. Additionally, all three variables are found to contribute significantly to explaining cross-sectional returns in a three-factor model that includes the monetary sector.

JEL Classification: E44, E52, G12

Suggested Citation

Jensen, Gerald and Mercer, Jeffrey M., Monetary Policy and the Cross-Section of Security Returns. Available at SSRN: https://ssrn.com/abstract=253035

Gerald Jensen

Northern Illinois University ( email )

Barsema Hall
Finance Department
DeKalb, IL 60115
United States
815-753-6399 (Phone)

Jeffrey M. Mercer (Contact Author)

Texas Tech University - Department of Finance ( email )

Rawls College of Business Administration
Lubbock, TX 79409
United States
806-742-3365 (Phone)
806-742-3197 (Fax)

HOME PAGE: http://jmercer.ba.ttu.edu/

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