Monetary Policy and the Cross-Section of Stock Returns in a Market with Distortions

47 Pages Posted: 2 Aug 2021 Last revised: 11 Aug 2021

See all articles by Xiaoyang Li

Xiaoyang Li

Deakin University

Xuan Zhou

Renmin University of China

XIAOLIN GONG

affiliation not provided to SSRN

Date Written: July 29, 2021

Abstract

We study the effects of monetary policy in an economy with distortions. Between 2006 and 2019, China’s central bank frequently adjusted required reserve ratios (RR) and interest rates (IR) to implement monetary policy. We examine how stock prices react to these adjustments and distinguish between state-owned-enterprises (SOEs) and private-owned-enterprises (POEs). We find that SOEs benefit disproportionately more from expansionary monetary policy than POEs, especially via interest rate cuts. In contrast, POEs benefit greatly from contractionary monetary policy via interest rate hikes. These findings shed light on the monetary transmission mechanisms in a market with interest rate control and credit rationing.

Keywords: monetary policy, cross-section of stock returns, state-owned enterprises

JEL Classification: E58, G14, G30, P34

Suggested Citation

Li, Xiaoyang and Zhou, Xuan and GONG, XIAOLIN, Monetary Policy and the Cross-Section of Stock Returns in a Market with Distortions (July 29, 2021). Available at SSRN: https://ssrn.com/abstract=3895469 or http://dx.doi.org/10.2139/ssrn.3895469

Xiaoyang Li (Contact Author)

Deakin University ( email )

70 Elgar Rd
Burwood, Victoria 3125
Australia

Xuan Zhou

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

XIAOLIN GONG

affiliation not provided to SSRN

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
36
Abstract Views
291
PlumX Metrics