Monetary Shocks, Policy Tools and Financial Firm Stock Returns: Evidence From the 2008 US Quantitative Easing

Posted: 29 Nov 2018

See all articles by M. Kabir Hassan

M. Kabir Hassan

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

Ali Ashraf

Frostburg State University

Will Hippler

University of La Verne

Date Written: April 12, 2016

Abstract

We extend the work of Bernanke and Kuttner [(2005). What explains the stock market’s reaction to federal reserve policy? Journal of Finance, 60, 1221–1257] by examining the impact of monetary shocks and policy tools on aggregate stock returns as well as the stock returns of financial institutions during the recent period of quantitative easing (QE) in the US. Specially, we test for the effectiveness of a major non-conventional monetary policy tool, the use of special asset purchase programs by the Federal Reserve, in impacting the financial markets. Estimates from vector auto-regression (VAR) analyses show that the impact of both unexpected and expected monetary shocks on aggregate stock returns is magnified several times during periods of QE. In addition, traditional monetary policy tools, like the Federal Funds rate, have no impact on aggregate stock returns, neither leading up to, nor during QE, while our non-conventional policy measure does appear to have some impact. In an extension of our results, we find that unexpected monetary shocks have an increased marginal impact on the stock returns of financial firms during QE. In addition, the stock returns of financial institutions have significant reactions to both changes in non-conventional monetary policy tools and announcements surrounding non-conventional policy actions.

Keywords: Financial Crisis, Monetary Policy, Quantitative Easing

JEL Classification: G01, E42, E44, E53, E58

Suggested Citation

Hassan, M. Kabir and Ashraf, Ali and Hippler, William, Monetary Shocks, Policy Tools and Financial Firm Stock Returns: Evidence From the 2008 US Quantitative Easing (April 12, 2016). Available at SSRN: https://ssrn.com/abstract=3263306

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

Ali Ashraf

Frostburg State University ( email )

Frostburg, MD 21532
United States

HOME PAGE: http://www.frostburg.edu/dept/mktfin/department-faculty/dr-ali-ashraf/

William Hippler

University of La Verne ( email )

1950 Third Street
La Verne, CA 91750
United States

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