Asymmetric Information, Stock Returns and Monetary Policy: A Theoretical and Empirical Analysis

Bedri Tas

No 490, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: It is known that stock returns are affected by monetary policy. This paper theoretically and empirically investigates whether asymmetric information between the Federal Reserve and the public causes the relation between stock returns and monetary policy actions. The paper concludes that asymmetric information between the Federal Reserve and the public is one of the reasons of effects of monetary policy actions on stock returns. A Kalman filter algorithm is constructed to analyze the information and learning dynamics between the Federal Reserve and a representative investor. Stock prices react to monetary policy actions because monetary policy actions reveal the private information that the Fed has about future inflation and output. Investors update their expectations after observing the Fed's actions and that produces a change in stock returns. The findings of the model are empirically investigated using VAR and impulse responses verify the theoretical findings

Keywords: Asymmetric Information; Monetary Policy; Stock Returns; Kalman Filter; Learning (search for similar items in EconPapers)
JEL-codes: D82 E44 E52 G12 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-fin, nep-mac, nep-mon and nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://repec.org/esNASM04/up.14930.1075564024.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecm:nasm04:490

Access Statistics for this paper

More papers in Econometric Society 2004 North American Summer Meetings from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().