The Fed and the Stock Market: A Tale of Sentiment States

80 Pages Posted: 23 Jun 2018

See all articles by Haifeng Guo

Haifeng Guo

University of Glasgow - Adam Smith Business School, Students

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School

Alexandros Kontonikas

Essex Business School

Date Written: June 8, 2018

Abstract

We show that the state of investor sentiment strongly affects the transmission of conventional and non-convectional monetary policy to the stock market. During sentiment-correction periods, the excess stock market return is 2% (1%) on the day of an unexpected 25 basis points cut in the FFR (interest rate path). Also, the stock market responds significantly to announcements of central bank liquidity swaps. Furthermore, the industrial portfolios’ response is consistent with the implications of the CAPM, which suggests that during such periods investors process information more systematically. In contrast, during periods of optimism build-up, the stock market response is statistically insignificant.

Keywords: Investor Sentiment States, Monetary Policy, Stock Market Returns, Asymmetry

JEL Classification: G11, G12, G14, E44, E52

Suggested Citation

Guo, Haifeng and Hung, Chi-Hsiou Daniel and Kontonikas, Alexandros, The Fed and the Stock Market: A Tale of Sentiment States (June 8, 2018). Available at SSRN: https://ssrn.com/abstract=3184974 or http://dx.doi.org/10.2139/ssrn.3184974

Haifeng Guo

University of Glasgow - Adam Smith Business School, Students ( email )

Glasgow, Scotland
United Kingdom

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School ( email )

Gilbert Scott Building
University of Glasgow
Glasgow, Scotland G12 8QQ
United Kingdom

Alexandros Kontonikas (Contact Author)

Essex Business School ( email )

University of Essex
Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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