Monetary Policy and the Equity Term Structure

94 Pages Posted: 29 Apr 2021 Last revised: 29 Jun 2022

See all articles by Benjamin Golez

Benjamin Golez

University of Notre Dame

Ben Matthies

University of Notre Dame

Date Written: April 28, 2021

Abstract

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

Suggested Citation

Golez, Benjamin and Matthies, Ben, Monetary Policy and the Equity Term Structure (April 28, 2021). Available at SSRN: https://ssrn.com/abstract=3836206 or http://dx.doi.org/10.2139/ssrn.3836206

Benjamin Golez (Contact Author)

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)

HOME PAGE: http://business.nd.edu/BenGolez/

Ben Matthies

University of Notre Dame ( email )

South Bend, IN
United States

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