Monetary policy, stock market and sectoral comovement

Pierre Guérin and Danilo Leiva-Leon ()

No 1731, Working Papers from Banco de España

Abstract: This paper evaluates the role that sectoral comovement plays in the propagation of monetary policy shocks on the stock market. In doing so, we introduce a factor-augmented vector autoregressive model with heterogeneous regime-switching factor loadings, denoted as MS2-FAVAR, that allows us to jointly assess (i) potential changes in the degree of comovement between each sector-specific stock return and the aggregate stock market as well as (ii) the propagation of monetary policy shocks taking into account such changes in comovement. We find that the efects of monetary policy shocks on stock returns are substantially amplied when industries experience a stronger degree of comovement, suggesting that a more interconnected stock market is more prone to the propagation of monetary policy shocks. The MS2-FAVAR model is also well-suited to perform a network analysis to characterize linkages in large datasets.

Keywords: stock market; monetary policy; markov-switching; factor model; network analysis (search for similar items in EconPapers)
JEL-codes: C32 E44 G12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2017-08
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1731

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