Monetary policy uncertainty, monetary policy surprises and stock returns

Ghezal Sekandary and Mikael Bask

Journal of Economics and Business, 2023, vol. 124, issue C, No S0148619522000625

Abstract: We study the effects of monetary policy surprises on stock returns under low and high monetary policy uncertainty in the U.S. using the Panel Smooth Transition Regression (PSTR) model to identify the uncertainty regimes. Monetary policy surprises are unexpected changes in the Federal Funds Rate (FFR) on Federal Open Market Committee (FOMC) announcement days, where the mimicking portfolio method is used to obtain a regular time series with surprises since the announcements occur on an irregular basis. Using data for the period 1994–2008, we find a negative relationship between monetary policy surprises and stock returns under both uncertainty regimes but a less pronounced relationship between surprises and returns when uncertainty is low. Hence, it is more important to hedge against unexpected stock market volatility when the uncertainty in monetary policy is high compared to when uncertainty is low.

Keywords: FFR; FOMC; Monetary policy; Policy uncertainty; PSTR model; Stock return (search for similar items in EconPapers)
JEL-codes: E52 G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:124:y:2023:i:c:s0148619522000625

DOI: 10.1016/j.jeconbus.2022.106106

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