The Fed and the Stock Market: An Identification Based on Intraday Futures Data

Stefania D'Amico and Mira Farka ()

Journal of Business & Economic Statistics, 2011, vol. 29, issue 1, 126-137

Abstract: This article develops a new identification procedure to estimate the contemporaneous relation between monetary policy and the stock market within a vector autoregression (VAR) framework. The approach combines high-frequency data from the futures market with the VAR methodology to circumvent exclusion restrictions and achieve identification. Our analysis casts doubt on VAR models imposing a recursive structure between innovations in policy rates and stock returns. We find that a tightening in policy rates has a negative impact on stock prices and that the Federal Reserve (Fed) has responded significantly to movements in the stock market. Estimates are robust to various model specifications.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:29:y:2011:i:1:p:126-137

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DOI: 10.1198/jbes.2009.08019

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