Monetary Policy and the Investment Companies

41 Pages Posted: 1 Nov 2018

See all articles by Syed M. Harun

Syed M. Harun

Texas A&M University - Kingsville

M. Kabir Hassan

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

Tribhuvan Puri

University of Massachusetts Dartmouth - Department of Accounting & Finance

Date Written: 2018

Abstract

We examine the impact of monetary policy actions on the returns of investment companies. We observe that an expansionary monetary policy action increases the returns of investment companies, while a contractionary policy action depresses the returns. We observe that monetary policy actions have asymmetric effects on returns across different monetary policy environments. We observe that the response of the returns of investment companies to surprise federal funds target rate changes is large and statistically significant. Returns are statistically significantly affected by positive policy surprises (larger than expected value of the federal funds target rate) while they are not significantly affected by negative positive surprises. We observe that the effects of monetary policy on the investments companies are asymmetric across different business conditions and the results are robust to different identification schemes of the business conditions. We find evidence that the effect of monetary policy on the returns of investments companies in good business conditions is statistically significant compared to bad business conditions. Surprise monetary expansion is interpreted by investors as bad news in high levels of economic activity while it is interpreted as good news in low levels of economic activity. Furthermore, we find that the asymmetric effect of monetary policy across different business conditions are due to the asymmetric effect of monetary policy on the discount rates and expected cash flow proxies. Moreover, we find evidence that the effect of monetary policy on the returns of investments companies are driven by its effect through changes in discount rate proxies as opposed to expected cash flow proxies. The results imply that the monetary policy plays a strong signaling role for the stock market and that any asset-pricing model for investments companies should take into account the effect of monetary policy by incorporating an interest rate-based indicator of monetary policy in the model.

Keywords: Monetary Policy, Investments companies, Business Conditions, Stock Returns

JEL Classification: E52, G20

Suggested Citation

Harun, Syed M. and Hassan, M. Kabir and Puri, Tribhuvan, Monetary Policy and the Investment Companies (2018). Available at SSRN: https://ssrn.com/abstract=3263301 or http://dx.doi.org/10.2139/ssrn.3263301

Syed M. Harun

Texas A&M University - Kingsville ( email )

CBA #212
700 Unversity Blvd.
Kingsville, TX 78363
United States

M. Kabir Hassan (Contact Author)

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

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Tribhuvan Puri

University of Massachusetts Dartmouth - Department of Accounting & Finance ( email )

285 Old Westport Road
N Dartmouth, MA 02747-2300
United States
508-999-8426 (Phone)

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