Monetary Policy and Stock Prices: Does the 'Fed Put' Work When It Is Most Needed?

Journal of Futures Markets, Forthcoming

37 Pages Posted: 21 Mar 2016

See all articles by Alexander Kurov

Alexander Kurov

West Virginia University - College of Business & Economics

Chen Gu

Shanghai Business School - Research Center of Finance

Date Written: March 19, 2016

Abstract

Most studies of the effect of monetary policy on asset prices use the event study methodology with daily data. The resulting estimates suffer from bias due to omitted variables and endogeneity of policy decisions. We provide evidence that this bias becomes so large during the 2007-2008 financial crisis that it reverses the sign of the estimated stock market response to monetary news, leading to an erroneous conclusion that interest rate cuts are bad news for stocks. We also examine the stock market reaction to monetary policy during the zero lower bound period. The results show a significant bias in daily event study estimates of the stock market response to news about the future path of monetary policy.

Keywords: Monetary policy, Stock returns, Intraday data, Financial crisis

JEL Classification: E44, E52, E58, G14, G18

Suggested Citation

Kurov, Alexander and Gu, Chen, Monetary Policy and Stock Prices: Does the 'Fed Put' Work When It Is Most Needed? (March 19, 2016). Journal of Futures Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2751476

Alexander Kurov (Contact Author)

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

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

Chen Gu

Shanghai Business School - Research Center of Finance ( email )

Shanghai
China

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