Monetary policy shocks and stock returns: evidence from the British market (original) (raw)

UK Stock Returns and the Impact of Domestic Monetary Policy Shocks

Journal of Business Finance & Accounting, 2007

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.

UK Stock Returns & the Impact of Domestic Monetary Policy Shocks

2005

1-Equity returns , Mispricing , and Monetary Policy in the UK

2008

This paper examines the impact of the decisions of the Bank of England on the equity returns of the UK and the channels through which these effects are transmitted to the stock market. We employ a number of alternative approaches including an event study framework to measure the impact of monetary policy surprises both on aggregate and sectoral indices and a methodology developed by Bernanke and Kuttner (2005). Our results from the first approach conform to theoretical priors but also reveal that monetary policy decisions affect equity returns asymmetrically not only with regards to the direction of the decision, but also with the size of the portfolio examined. Predictability of the future actions of the Bank of England has increased after the institutional reform that took place in 1997. We find that monetary policy is transmitted to the stock market post-97 mainly through its effects on expectations of future earnings prospects. Finally, we find that changes in the institutional ...

Stock Returns and Monetary Policy: Are There Any Ties ?

2010

This paper empirically investigates the following three questions: (i) Do stock returns respond to monetary policy shocks? (ii) Do stock returns alter the transmission mechanism of monetary policy? and (iii) Does monetary policy systematically react to stock returns? Existing research based on event studies and Structural Vector Auto-Regressions (SVAR) documents that stock returns increase significantly following an unanticipated monetary policy

Interest rate risk and the creation of the Monetary Policy Committee: Evidence from banks’ and life insurance companies’ stocks in the UK.

Journal of Economics and Business, 2014

This paper investigates the effect that the creation of the Monetary Policy Committee (MPC) has had on the interest rate risk which banks and life insurance companies face in the UK. By means of GARCH-M methodology, the stock returns are modelled on the CAPM and the Fama-French asset-pricing models, augmented with interest rate risk factors and referring to short- and long-term rates. Our results indicate that in the period before the Bank of England (BoE) was granted operational independence, changes in the level and volatility of interest rates significantly affected the stock returns of these companies. These effects have diminished since the MPC’s creation in May 1997. In parallel, since the MPC’s creation, macroeconomic uncertainty, as proxied by the MPC dissents, coexisted with significant effects on the short-term interest rate risk which banks and life insurance companies face. These results should be of interest to both analysts and policy-makers with respect to financial stability.

Monetary Policy Announcements and Stock Returns: Evidence from the Pakistani Market

Transition Studies Review, 2011

Objective of this paper is to analyze the impact of monetary policy announcements on stock returns. Event window of 31 days and an estimation window of 250 days was constructed. ARIMA model is applied to calculate the estimated returns from estimation window (t -250). Abnormal returns were calculated by taking the difference between actual and estimated returns. Then abnormal returns were aggregated as cumulative abnormal returns (CAR). CAR at 30% showed an impact of monetary policy announcements on stock returns. Null hypothesis of zero abnormal returns was rejected since the results were found in critical region under normal distribution. Further, we decomposed the interest rate into expected and un-expected to analyze their impact on stock returns. After checking for stationarity, Engle-Granger co-integration test were applied to check long run relationship between interest rates and stock return. A significant effect of interest rates (expected and un-expected) was observed in the short run. These results are in line with Kuttner's (J Monet Econ 47:523-544, 2001), Bernanke and Kuttner's (J Financ 60:1221-1257, 2005), Bredin et al.'s (US stock returns the impact of domestic monetary policy shocks, http:/ /www.ucd.ie/t4cms/wp0604.pdf, 2007) and Ehrmann and Fratzscher's (Equal size, equal role? Interest rate interdependence between the Euro Area and the United States, European Central Bank Working Paper 342, 2004). The study finds evidence of LR relationship between unexpected interest rates and whereas expected interest rates and stock returns have short term relationship.

Monetary Policy Impact on Stock Return: Evidence from Growing Stock Markets

Theoretical Economics Letters, 2016

This study investigates the impact of monetary policies on stock markets based on a sample of five open countries with growing stock market over the period 2004 to 2014. Using a random effect model for the panel regression coupled with a panel vector error correction model to study the short term and long term relationship between the variables, the findings reveal a negative relation between interest rate and stock return and a direct link between money supply and stock return. The results confirm that both in the short run and long run monetary variables explain changes in stock return.

Monetary Policy and Stock Markets: Evidence from EU

The analysis of monetary policy impact-via interest rate as instrument of intervention-on the evolution of stock market prices has gained more popularity during the current crisis due to the accumulation of financial imbalances. This article investigates the impact of monetary policy on equity indexes in European Union countries from January 2000 to February 2012, using cointegration and Granger causality tests. The results reveal the existence of long and short term relationship between stock prices and interest rates. We also find that on the long-run the comovement between interest rates and stock prices are stronger during crisis period, when compared with entire period.

Monetary policy and stock returns under the MPC and inflation targeting

International Review of Financial Analysis, 2014

We examine the implications of the Monetary Policy Committee (MPC) framework for the monetary policyequity returns relationship in the UK. Using a standard event study methodology, we do not find a significant relationship between market-based policy surprises and equity returns. After controlling for joint response bias using Thornton's (in press) framework, we find that unexpected policy rate changes enter the stock prices discovery process. Moreover, we produce evidence that the impact of MPC policy decisions on equities depends on the MPC members' voting record publication, especially when the last reveals unanimity versus dissent voting.

European Monetary Policy Surprises: the Aggregate and Sectoral Stock Market Response

International Journal of …, 2009

In this paper we investigate the stock market response to international monetary policy changes in the UK and Germany. Specifically, we analyse the impact of (un)expected changes in UK and German/euro area policy rates on UK and German aggregate and sectoral stock returns in an event study. The decomposition of the (un)expected changes in policy rates are based on futures markets. Overall, our results suggest that, UK monetary policy surprises have a significant negative influence on both aggregate and industry level stock returns in both the UK and Germany. The influence of German/Euro area monetary policy shocks appears insignificant for both countries.

Monetary policy shocks and stock returns: evidence from the British market (original) (raw)

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