Can the Fed Talk the Hind Legs Off the Stock Market?
by Sylvester Eijffingera, Ronald Mahieub and Louis Raesc
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.
JEL Codes: G14, E44, E52, E58.
Full article (PDF, 42 pages, 306 kb)
a CentER and European Banking Center, Tilburg University, CEPR
b CentER and Netspar
c CentER and European Banking Center, Tilburg University