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Monetary Policy, External Finance Dependence, and the Cross-section of Stock Returns: A FAVAR Approach

Victor Duarte, Carlos Carvalho and Tiago Berriel ()
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Victor Duarte: MIT

No 1214, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We use an identified factor-augmented vector autoregression (FAVAR) to estimate the impact of monetary policy shocks on the cross-section of stock returns. Our FAVAR combines unobserved factors extracted from a large set of financial and macroeconomic indicators with the Federal Funds rate. We find that monetary policy shocks have heterogeneous effects on the cross-section of stock returns. These effects are well explained by the degree of external finance dependence, and by variables that arguably correlate with it. We also find that the cross- section of stock return responses to monetary policy shocks can be very well explained by the response of the Fama-French factors to those shocks.

Date: 2013
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