The Identification of Response of Stock Returns to Monetary Policy Actions Using Market-Based Measures of Monetary Policy Shocks

Abstract

The authors investigate two related approaches to dealing with the possible joint repsonse bias in using Kuttner's approach to identifying monetary policy's impact on stock returns - the methodology recently suggested by Thornton, and use of intraday data. For all three methods, the estimated impact of monetary policy actions on stock returns is negative and statistically significant, and findings show that this negative impact is magnified during the bear markets and during recessions. We find point estimates indicating a positive joint response bias using Thornton's methodology, although these are not statistically significant. We find that intraday data provide the same qualitative pattern of results, but the estimated magnitude of the impact of monetary policy on stock returns is smaller compared to either approach using daily data.