Wiranto, Wellian. 2008. Reaction of Stock Market to Monetary Policy Surprises. Doctoral
Dissertation, Cornell University.
This paper provides an
empirical analysis of stock market reactions to monetary policy surprises. Its
principal objective is to understand the heterogeneous nature of this type of
response by examining a set of possible explanatory factors. I find that a
hypothetical unanticipated increase of 25 bps in the target Federal Reserve
funds rate would result in a one-day decline of 1.3 percent in the prices of
S&P 500 stocks. There is some evidence that factors such as sector and
industry groups, firm size, and the foreign earnings exposure of a firm could
affect the reaction reflected in its stock price. The severity of the equity
market’s response also appears to be associated with elements of the
macroeconomic environment such as the level of prevailing interest rates and
inflation expectations. Moreover, my results suggest that a lack of unanimity
in the FOMC votes could curb the reaction of the stock market.
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