Can the Fed talk the hind legs off the stock market?

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper analyzes the impact of U.S. central bank communication on individual stock returns. We find a strong conditional effect of communication on stocks. The response of equities to central bank talk depends critically on the business cycle. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion, the effect is weaker and on average negative. The impact of central bank communication on stock prices displays similar cross-sectional variation as central bank actions. Cyclical industries are found to be more sensitive to central bank communication. We find that the stock prices of firms which have low cash flows, low returns to assets or equity, very high or low debt levels, small size, or which use more trade credit are affected more by central bank communication. Our evidence suggests that central bank communication by the Federal Open Market Committee has an impact on stocks and provides additional evidence for the demand and the credit channel.
Original languageEnglish
Pages (from-to)53-94
JournalInternational Journal of Central Banking
Volume13
Issue number1
Publication statusPublished - Feb 2017

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Stock market
Central bank communication
Equity
Central bank
Communication
Stock prices
Industry
Credit channel
Trade credit
Debt
News
Business cycles
Assets
Stock returns
Cash flow
Monetary policy

Cite this

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title = "Can the Fed talk the hind legs off the stock market?",
abstract = "This paper analyzes the impact of U.S. central bank communication on individual stock returns. We find a strong conditional effect of communication on stocks. The response of equities to central bank talk depends critically on the business cycle. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion, the effect is weaker and on average negative. The impact of central bank communication on stock prices displays similar cross-sectional variation as central bank actions. Cyclical industries are found to be more sensitive to central bank communication. We find that the stock prices of firms which have low cash flows, low returns to assets or equity, very high or low debt levels, small size, or which use more trade credit are affected more by central bank communication. Our evidence suggests that central bank communication by the Federal Open Market Committee has an impact on stocks and provides additional evidence for the demand and the credit channel.",
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Can the Fed talk the hind legs off the stock market? / Eijffinger, Sylvester; Mahieu, Ronald; Raes, Louis.

In: International Journal of Central Banking, Vol. 13, No. 1, 02.2017, p. 53-94.

Research output: Contribution to journalArticleScientificpeer-review

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