Leverage and Time-Varying Effects of Monetary Policy on the Stock Market

Severin Bernhard and Philip Vermeulen

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Using high-frequency identification, we investigate leverage of the firm and economy-wide leverage as determinants of the sensitivity of a firm's stock price to monetary policy announcements. We show that the effect of economy-wide leverage is substantially larger than the effect of the firm's own leverage. It is sufficient for the response of a firm's stock price to strengthen that other firms in the economy become more leveraged. We further show that economy-wide leverage fluctuations explain the time-varying effects of monetary policy on stock prices. Our results are robust controlling for a variety of common business cycle variables and household leverage.

Keywords: Monetary policy; stock returns; leverage (search for similar items in EconPapers)
JEL-codes: E44 E52 G14 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2023-01
New Economics Papers: this item is included in nep-fdg, nep-fmk and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2023-07

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