Monetary Shocks, Policy Tools and Financial Firm Stock Returns: Evidence from the 2008 U.S. Quantitative Easing

The Singapore Economic Review, Vol. 62, No. 01, pp. 27-56, March 2017

54 Pages Posted: 3 Apr 2017

See all articles by Ali Ashraf

Ali Ashraf

Frostburg State University

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Will Hippler

University of La Verne

Date Written: April 13, 2016

Abstract

We extend the work of Bernanke and Kuttner (2005) by examining the impact of monetary shocks and policy tools on aggregate stock and bond returns as well as the stock returns of financial institutions during the recent period of Quantitative Easing (QE) in the U.S. Specially, we test for the effectiveness of a major non-conventional monetary policy tool, the use of special asset purchase programs by the Federal Reserve, in impacting the financial markets. Estimates from vector auto-regression (VAR) analyses show that the impact of both unexpected and expected monetary shocks on aggregate stock returns and bond spreads is magnified several times during periods of QE. In addition, traditional monetary policy tools, like the Federal Funds rate, have no impact on aggregate stock and bond returns, neither leading up to, nor during QE, while our non-conventional policy measure does appear to have some impact. In an extension of our results, we find that unexpected monetary shocks have an increased marginal impact on the stock returns of financial firms during QE. In addition, the stock returns of financial institutions and banks have significant reactions to both changes in non-conventional monetary policy tools and announcements surrounding non-conventional policy actions. Our results are most robust for large banks.

Keywords: Financial Crisis, Monetary Policy, Quantitative Easing

JEL Classification: G01, E42, E44, E53, E58

Suggested Citation

Ashraf, Ali and Hassan, M. Kabir and Hippler, William, Monetary Shocks, Policy Tools and Financial Firm Stock Returns: Evidence from the 2008 U.S. Quantitative Easing (April 13, 2016). The Singapore Economic Review, Vol. 62, No. 01, pp. 27-56, March 2017, Available at SSRN: https://ssrn.com/abstract=2944496

Ali Ashraf (Contact Author)

Frostburg State University ( email )

Frostburg, MD 21532
United States

HOME PAGE: http://www.frostburg.edu/dept/mktfin/department-faculty/dr-ali-ashraf/

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

William Hippler

University of La Verne ( email )

1950 Third Street
La Verne, CA 91750
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
39
Abstract Views
743
PlumX Metrics