Sentiment Regimes and Reaction of Stock Markets to Conventional and Unconventional Monetary Policies: Evidence from OECD Countries

Oguzhan Cepni, Rangan Gupta and Qiang Ji

No 202126, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we investigate how conventional and unconventional monetary policy shocks affect the stock market of eight advanced economies, namely, Canada, France, Germany, Japan, Italy, Spain, the U.K., and the U.S., conditional on the state of sentiment. In this regard, we use a panel vector auto-regression (VAR) with monthly data (on output, prices, equity prices, metrics of monetary policies, and consumer and business sentiments) over the period of January 2007 till July 2020, with the monetary policy shock identified through the use of both zero and sign restrictions. We find robust evidence that, compared to the low investor sentiment regime, the reaction of stock prices to expansionary monetary policy shocks is stronger in the state associated with relatively higher optimism, both for the overall panel and the individual countries (with some degree of heterogeneity). Our findings have important implications for academicians, investors, and policymakers.

Keywords: Conventional and unconventional monetary policies; equity prices; sentiment; OECD countries; panel VAR; zero and sign restrictions (search for similar items in EconPapers)
JEL-codes: C32 C33 E30 E51 E52 G15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2021-04
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Journal Article: Sentiment Regimes and Reaction of Stock Markets to Conventional and Unconventional Monetary Policies: Evidence from OECD Countries (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:202126

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