When Does the Fed Care About Stock Prices?

44 Pages Posted: 29 Aug 2018 Last revised: 31 May 2022

See all articles by Alexander Kurov

Alexander Kurov

West Virginia University - College of Business & Economics

Eric Olson

Independent; University of Tulsa

Gulnara R. Zaynutdinova, Ph.D.

West Virginia University, Department of Finance

Date Written: May 25, 2022

Abstract

We propose a novel identification approach based on a predictable change in the intraday volatility of index futures to estimate the Federal Reserve’s reaction to stock returns. This identification approach relies on a weaker set of assumptions than required under identification through heteroskedasticity based on lower frequency data. Our approach also allows the examination of changes in the reaction of monetary policy to the stock market. We document an asymmetric response of policy expectations to changes in stock prices in adverse and positive economic environments. Specifically, 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 Olson, Eric and Zaynutdinova, Gulnara R., When Does the Fed Care About Stock Prices? (May 25, 2022). Journal of Banking and Finance, Forthcoming, 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

University of Tulsa ( email )

600 South College
Tulsa, OK 74104
United States

Independent ( email )

Gulnara R. Zaynutdinova

West Virginia University, Department of Finance ( email )

John Chambers College of Business and Economics
Morgantown, WV 26506
United States

HOME PAGE: http://https://business.wvu.edu/

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