Economic factors, monetary policy and expected returns on stocks and bonds

James R. Booth and Lena Chua Booth

Economic Review, 1997, 32-42

Abstract: This paper examines the impact of the stance of monetary policy on security returns. The two measures of the stance of monetary policy used, the federal funds rate and an index based on the changes in the discount rate, contain significant information that can be used to forecast expected stock and bond portfolio returns. Specifically, we find that a restrictive (expansive) monetary policy stance decreases (increases) returns of large and small stock portfolios and in some cases, corporate bond portfolios. The monetary policy stance measures have explanatory power in forecasting stock and bond returns, beyond the business conditions proxies.

Keywords: Stock - Prices; Bonds; Corporate bonds; Monetary policy - United States; Federal funds rate (search for similar items in EconPapers)
Date: 1997
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