Monetary Policy and the Equity Term Structure

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