The Fed and the Stock Market: A Tale of Sentiment States
80 Pages Posted: 23 Jun 2018
Date Written: June 8, 2018
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: Suggested Citation