Stock Market Reaction to Fed Funds Rate Surprises: State Dependence and the Financial Crisis

Alexandros Kontonikas (ak16270@essex.ac.uk), Ronald MacDonald and Aman Saggu

No 2012-72, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: This paper examines the impact of Federal Funds rate (FFR) surprises on stock returns in the United States over the period 1989-2009, focusing on the impact of the recent financial crisis. We find that prior to the crisis, stock prices increased as a response to unexpected FFR cuts. State dependence is also identified with stocks exhibiting larger increases when interest rate easing coincided with recessions, bear stock markets, and tightening credit market conditions. However, an important structural shift took place during the financial crisis, which changed the stock market response to FFR shocks, as well as the nature of state dependence. Specifically, during the crisis period stock market participants did not react positively to unexpected FFR cuts. Our results highlight the severity of the recent financial turmoil episode and the ineffectiveness of conventional monetary policy close to the zero lower bound for nominal interest rates.

Keywords: Monetary Policy; Stock Market; State Dependence; Financial Crisis (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10943/407
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Stock market reaction to fed funds rate surprises: State dependence and the financial crisis (2013)
Working Paper: Stock market reaction to fed funds rate surprises: state dependence and the financial crisis (2012)
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:edn:sirdps:407

Access Statistics for this paper

More papers in SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE) 31 Buccleuch Place, EH8 9JT, Edinburgh. Contact information at EDIRC.
Bibliographic data for series maintained by Research Office (econ-research@ed.ac.uk).