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Dynamic linkages between monetary policy and the stock market

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Abstract

This paper examines the dynamic linkages between the federal funds rate and the stock market during the 1970–2004 period using the VAR methodology. We detected a disconnection between Fed actions and market responses in the 1990s relative to the 1970s and 1980s. Upon further analyses, we observed asymmetric effects of monetary policy actions on the stock market and that such actions were more turbulent during bear markets than bull markets. Overall, our results appear to suggest that there was consistent dynamic relationship between the conduct of monetary policy and the corresponding behavior by the stock market during the last three decades.

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Acknowledgments

The author is indebted to an anonymous reviewer who made several insightful comments and the Review’s editor, C. F. Lee, for encouragement. An earlier draft of this paper was presented at the Eastern Economic Association (2007) meetings and the comments by Phillip Arestis and the session participants are gratefully acknowledged. Finally, this paper benefited from a grant from Fairfield University. The usual disclaimer applies

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  1. Department of Finance, Dolan School of Business, Fairfield University, North Benson Rd, Fairfield, CT, 06824, USA

    Nikiforos T. Laopodis

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Correspondence to Nikiforos T. Laopodis.

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Laopodis, N.T. Dynamic linkages between monetary policy and the stock market. Rev Quant Finan Acc 35, 271–293 (2010). https://doi.org/10.1007/s11156-009-0154-7

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