State-Dependent Stock Market Reactions to Monetary Policy: 'Bubble' vs. Fundamental States
22 Pages Posted: 20 Feb 2006
Date Written: May 5, 2006
Abstract
This paper presents a test of the response of stock prices to Federal Reserve policy shocks using a Markov-switching framework. The framework endogenously identifies two distinct regimes. The first is a state where the S&P 500 index exhibits a significantly negative response to unexpected changes in the federal funds target in the thirty minute window bracketing FOMC announcements, a result consistent with previous work. However, the model identifies a second regime from September 1998 to September 2002, where the response of stock prices to policy shocks is insignificant and more volatile relative to the other regime.
Keywords: Monetary Policy, Stock Market, Markov Switching
JEL Classification: E44, G14
Suggested Citation: Suggested Citation
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