Monetary Policy and the Equity Term Structure
94 Pages Posted: 29 Apr 2021 Last revised: 29 Jun 2022
Date Written: April 28, 2021
We use a high-frequency event study approach to analyze the impact of monetary policy surprises on the term structure of equity prices. We document that short-term and long-term equity prices respond in opposite ways to changes in monetary policy. Following an unanticipated cut to the target rate, short-term equity prices fall while long-term equity prices rise on average. We develop a model which shows this pattern arises when policy decisions signal information about economic conditions. Consistent with model predictions, the short-term asset price response significantly predicts short-term macroeconomic growth and is positively related to central bank soft information.
Keywords: term structure, monetary policy, information effects, asset pricing, fed information, dividend strips
JEL Classification: E50, G10
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