Time-varying impact of monetary policy shocks on US stock returns: The role of investor sentiment

Oguzhan Cepni and Rangan Gupta

The North American Journal of Economics and Finance, 2021, vol. 58, issue C

Abstract: This paper investigates how monetary policy shock affects the stock market of the United States (US) conditional on states of investor sentiment. In this regard, we use a recently developed estimator that uses high-frequency surprises as a proxy for the structural monetary policy shocks, which in turn is achieved by integrating the current short-term rate surprises, which are least affected by an information effect, into a vector autoregressive (VAR) model as an exogenous variable. When allowing for time-varying model parameters, we find that, compared to the low investor sentiment regime, the negative reaction of stock returns to contractionary monetary policy shocks is stronger in the state associated with relatively higher investor sentiment. Our results are robust to alternative sample period (which excludes the zero lower bound) and model specification and also have important implications for academicians, investors, and policymakers.

Keywords: Investor sentiment; External instruments; Monetary policy surprises; Time-varying parameter VAR model (search for similar items in EconPapers)
JEL-codes: E44 E52 G12 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Time-Varying Impact of Monetary Policy Shocks on U.S. Stock Returns: The Role of Investor Sentiment (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001601

DOI: 10.1016/j.najef.2021.101550

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