Large Firms and Monetary Policy Surprises: Unraveling Excessive Stock Price Sensitivity

Masyayuki Okada and Kazuhiro Teramoto
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Masyayuki Okada: Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masayuki.okada@boj.or.jp)
Kazuhiro Teramoto: Graduate School of Economics, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo, Japan. 186-8603. (Email: k.teramoto@r.hit-u.ac.jp)

No 25-E-06, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: This paper proposes a novel mechanism explaining why large firms exhibit stronger stock price responses to monetary policy surprises. Empirically, we show that endogeneity arising from the ex-post predictability of these surprises disproportionately affects large firms, leading to overestimated stock return responses. We develop an asset pricing model with granular-origin aggregate fluctuations and investors' imperfect knowledge of monetary policy rule parameters. The model demonstrates that belief revisions about the policy stance drive both monetary policy surprises and heterogeneous stock price responses through changes in the risk premium - even without investor heterogeneity or differential effects of policy shocks on firm fundamentals.

Keywords: monetary policy surprises; stock returns; high-frequency identification; partial information; learning; granular-origin aggregate fluctuations (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 G12 (search for similar items in EconPapers)
Date: 2025-08
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