Stock returns and monetary policy stance

Bosung Jang and Inhwan So

International Review of Economics & Finance, 2024, vol. 92, issue C, 851-869

Abstract: This paper investigates the structural relationships between monetary policy and stock returns. We build an asset pricing model incorporating a standard Taylor rule into a consumption-CAPM framework. Our model quantitatively explains the negative risk premium of expansionary monetary policy. As monetary policy plays a role of insurance, (expansionary) monetary policy beta is negatively related to covariances of returns with output gap and inflation theoretically and empirically. In addition, while systematic responses mainly account for the negative risk premium, pure monetary policy shocks have little influence under plausible calibrations. We also provide theoretical predictions on how the slope of the Phillips curve and the response parameters of monetary policy affect the cross-section of returns.

Keywords: Monetary policy stance; r-star; Cross-sectional asset pricing; Monetary policy exposure (search for similar items in EconPapers)
JEL-codes: E44 E52 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:92:y:2024:i:c:p:851-869

DOI: 10.1016/j.iref.2024.02.062

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