UK Stock Returns and the Impact of Domestic Monetary Policy Shocks

17 Pages Posted: 11 Jul 2007

See all articles by Don Bredin

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance

Stuart Hyde

Alliance Manchester Business School - University of Manchester

Dirk Nitzsche

City University London - Sir John Cass Business School

Gerard O'Reilly

Central Bank & Financial Services Authority of Ireland

Abstract

We investigate the influence of changes in UK monetary policy on UK stock returns and the possible reasons behind such a response. Firstly, we conduct an event study to assess the impact of unexpected changes in monetary policy on aggregate and sectoral stock returns. The decomposition of unexpected changes in the policy rate is based on futures markets data. Secondly, using a variance decomposition in the spirit of Campbell (1991) we attempt to identity the channels behind the response of stock returns to monetary policy surprises. The variance decomposition results indicate that the monetary policy shock leads to a persistent negative response in terms of future excess returns for a number of sectors.

JEL Classification: G12, E44

Suggested Citation

Bredin, Don and Hyde, Stuart and Nitzsche, Dirk and O'Reilly, Gerard, UK Stock Returns and the Impact of Domestic Monetary Policy Shocks. Journal of Business Finance & Accounting, Vol. 34, No. 5-6, pp. 872-888, June/July 2007, Available at SSRN: https://ssrn.com/abstract=999763 or http://dx.doi.org/10.1111/j.1468-5957.2006.02001.x

Don Bredin (Contact Author)

University College Dublin (UCD) - Department of Banking & Finance ( email )

School of Business
Blackrock, Co. Dublin, 4
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff_bredin.html

Stuart Hyde

Alliance Manchester Business School - University of Manchester ( email )

Booth Street West
Mezzanine Floor, Crawford House
Manchester M15 6PB
United Kingdom
44 (0) 161 275 4017 (Phone)
44 (0) 161 275 4023 (Fax)

Dirk Nitzsche

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Gerard O'Reilly

Central Bank & Financial Services Authority of Ireland ( email )

P.O. 559 Dame Street
Dublin 2, D2
Ireland

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