Why Does the Fed React to the Stock Market Changes?: A Covariance Decomposition Analysis
TOBB University of Economics and Technology Department of Economics Working Paper No. 09-05
10 Pages Posted: 2 May 2011
Date Written: October 1, 2009
Abstract
This paper investigates the factors that affect the covariance between the federal funds rate and stock returns. I estimate a VAR system and implement covariance decomposition analysis. Most of the covariance between the federal funds rate and stock returns is affected by changes in stock market and output. These results conclude that the Fed is actually targeting stock returns directly.
Keywords: Monetary Policy, Stock Returns, Covariance Decomposion
JEL Classification: E44, E52, E58; E61, C32
Suggested Citation: Suggested Citation
Tas, Bedri Kamil Onur, Why Does the Fed React to the Stock Market Changes?: A Covariance Decomposition
Analysis (October 1, 2009). TOBB University of Economics and Technology Department of Economics Working Paper No. 09-05, Available at SSRN: https://ssrn.com/abstract=1827842 or http://dx.doi.org/10.2139/ssrn.1827842
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