Monetary Policy and the Stock Market: Time-Series Evidence

89 Pages Posted: 10 Jan 2017  

Andreas Neuhierl

University of Notre Dame - Department of Finance

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 4 versions of this paper

Date Written: November 24, 2016

Abstract

We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings.

Keywords: return predictability, policy speeches, expected returns, macro news

JEL Classification: E310, E430, E440, E520, E580, G120

Suggested Citation

Neuhierl, Andreas and Weber, Michael, Monetary Policy and the Stock Market: Time-Series Evidence (November 24, 2016). CESifo Working Paper Series No. 6199. Available at SSRN: https://ssrn.com/abstract=2895997

Andreas Neuhierl

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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