Movements in Yields, not the Equity Premium: Bernanke-Kuttner Redux

Stefan Nagel and Zhengyang Xu

No 32884, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that the stock market price reaction to monetary policy surprises upon announcements of the Federal Open Market Committee (FOMC) is explained mostly by changes in the default-free term structure of yields, not by changes in the equity premium. We reach this conclusion based on a new model-free method that uses dividend futures prices to obtain the counterfactual stock market index price change that results purely from the change in the default-free yield curve induced by the monetary policy surprise. The yield curve change in turn partly reflects a change in expected future short-term interest rates, as measured by changes in professional forecasts, and partly a change in the term premium. We further find that the even/odd week FOMC cycle in stock index returns is also largely due to an FOMC cycle in the yield curve rather than the equity premium.

JEL-codes: E52 G12 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-cba, nep-fmk and nep-mon
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Working Paper: Movements in Yields, Not the Equity Premium: Bernanke-Kuttner Redux (2024)
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