Do Monetary Policy Shocks Have Asymmetric Effects on Stock Market?

Victor Song and Libo Xu ()
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Victor Song: Simon Fraser University
Libo Xu: Lakehead University

Open Economies Review, 2023, vol. 34, issue 5, No 6, 1063-1078

Abstract: Abstract This paper investigates the relationship between monetary policy and the stock market using weekly U.S. data, following the work of Serletis and Istiak (2016). In doing so, vector autoregression (VAR) is adopted, and we allow rich interdependence between monetary policy and the stock market. The model is identified by exploiting the conditional heteroscedasticity of the reduced form VAR error terms. Two structural shocks – money demand and supply shocks – are extracted. The findings show a positive money demand shock, which increases the interest rate, decreases the stock price. On the other hand, a positive money supply shock does not significantly increase the stock price. We find that the impulse responses of stock prices are symmetric in positive and negative money supply shocks. It follows that money supply shocks do not have asymmetric effects on the stock market in general.

Keywords: Monetary policy; Stock price; VAR; GARCH (search for similar items in EconPapers)
JEL-codes: C32 C50 E44 E52 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11079-022-09710-5

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