When does the fed care about stock prices?

Alexander Kurov, Eric Olson and Gulnara Zaynutdinova

Journal of Banking & Finance, 2022, vol. 142, issue C

Abstract: We propose a novel identification approach based on a predictable change in the intraday volatility of index futures to estimate the Federal Reserve's reaction to stock returns. This identification approach relies on a weaker set of assumptions than required under identification through heteroskedasticity based on lower frequency data. Our approach also allows the examination of changes in the reaction of monetary policy to the stock market. We document an asymmetric response of policy expectations to changes in stock prices in adverse and positive economic environments. Specifically, the results show a sharp increase in the response of monetary policy expectations to stock returns during recessions and bear markets. This finding is consistent with the existence of the so-called “Fed put.”

Keywords: Monetary policy; Stock market; Intraday data; Futures; Identification; Heteroskedasticity (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G14 G18 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426622001522
Full text for ScienceDirect subscribers only

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:eee:jbfina:v:142:y:2022:i:c:s0378426622001522

DOI: 10.1016/j.jbankfin.2022.106556

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().