The Impact of Federal Reserve's Conventional and Unconventional Monetary Policies on Equity Prices

Vishuddhi Jayawickrema

MPRA Paper from University Library of Munich, Germany

Abstract: I estimate the effects of the Federal Reserve's forward guidance and large-scale asset purchases, along with the effects of interest rate changes under conventional policy, on the U.S. equity market, and assess the reasons for stock price responses. Although the overall stock market respond meaningfully to a surprise change in the federal funds rate with a high level of statistical significance, a heterogeneity in responses is observed among different sectors in the stock market. In contrast, forward guidance is found to have relatively homogeneous effects on sector-wise stock market performance. Such effects are large in magnitude and highly statistically significant. However, large-scale asset purchases exhibit minimal effects on equity price movements. The present value of future excess returns emerged as the most important channel through which the surprise changes in the federal funds rate as well as forward guidance and large-scale asset purchases affect current equity prices. The present value of future dividends and the real interest rates are found to make minor contributions the propagation of policy shocks. However, the relative contribution of future dividends, real interest rates and excess returns vary across sectors.

Keywords: forward guidance; quantitative easing; asset purchases; zero lower bound (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/104224/1/MPRA_paper_104224.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:104224

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().