More on Monetary Policy and Stock Price Returns
Posted: 16 Aug 2005
Recent research suggests a persistent empirical relation between U.S. monetary policy and stock returns since the mid-1980s. The findings seem questionable and incomplete, however, for at least three reasons. First, the results are sensitive to sample selection. Second, this research does not distinguish between anticipated and unanticipated monetary policy decisions. Third, such analysis does not satisfactorily consider that returns and policy are probably determined simultaneously because prices contain information about market expectations for the economy and, in turn, policy. Together, these issues suggest that investors are unlikely to profit from strategies based on past or anticipated Federal Reserve decisions.
Keywords: Economics: Relationship of Economic Activity to the Investment Process; Portfolio Management: Equity Strategies
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