The Time Varying Effect of Monetary Policy on Stock Returns

10 Pages Posted: 11 Jul 2022

See all articles by Dennis W. Jansen

Dennis W. Jansen

Texas A&M University - Department of Economics

Anastasia Zervou

University of Texas at Austin

Date Written: May 17, 2017

Abstract

We study the time varying effects of monetary policy on stock returns in order to capture changes over time on this transmission channel. We find that a one-percentage point surprise increase on the federal funds rate decreases the one-day stock return by 1.33% during the period 1989 to 2000 and by 7.47% during the period 2001 to 2007, i.e., over five times more. The effect is not statistically significant for most of the 1990s, but it is during the 2000s. These differences are not apparent in the bond market, suggesting an explanation focused on stock market operation.

Keywords: Monetary Policy transmission, Stock prices, Time Varying Parameter Model

JEL Classification: E52, E44, G14, C22

Suggested Citation

Jansen, Dennis W. and Zervou, Anastasia, The Time Varying Effect of Monetary Policy on Stock Returns (May 17, 2017). Economics Letters, Vol. 160, 2017, Available at SSRN: https://ssrn.com/abstract=4150305

Dennis W. Jansen

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States
409-845-7358 (Phone)
409-847-8757 (Fax)

Anastasia Zervou (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

HOME PAGE: http://https://liberalarts.utexas.edu/economics/faculty/az7379

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