How Much Does the Fed Care About Stock Prices?

26 Pages Posted: 29 Aug 2018

See all articles by Alexander Kurov

Alexander Kurov

West Virginia University - College of Business & Economics

Eric Olson

West Virginia University; Independent

Gulnara R. Zaynutdinova

West Virginia University

Date Written: August 20, 2018

Abstract

We use a predictable change in the intraday volatility of index futures to identify the effect of stock returns on monetary policy. This identification approach relies on a weaker set of assumptions than required under identification through heteroskedasticity based on lower frequency data. Our identification approach also allows examining time variation in the reaction of monetary policy to the stock market. The results show a sharp increase in the response of monetary policy expectations to stock returns during recessions and bear markets. This finding is consistent with the existence of the so-called “Fed put.”

Keywords: Monetary Policy, Stock Returns, Intraday Data, Futures, Identification, Heteroskedasticity

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

Suggested Citation

Kurov, Alexander and Olson, Eric and Zaynutdinova, Gulnara R., How Much Does the Fed Care About Stock Prices? (August 20, 2018). Available at SSRN: https://ssrn.com/abstract=3234977 or http://dx.doi.org/10.2139/ssrn.3234977

Alexander Kurov (Contact Author)

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

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

Eric Olson

West Virginia University ( email )

Morgantown, WV
United States

Independent ( email )

No Address Available

Gulnara R. Zaynutdinova

West Virginia University ( email )

Morgantown, WV 26506
United States

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