Abstract
The purpose of this study is to examine the effects of monetary policy on equity returns by applying an alternative econometric approach. Campbell and Ammer (1993) decomposed unexpected equity excess returns into three news components: risk premium news, real interest rate news and cash-flow news. The literature has determined the monetary policy (MP) effects on these news components. The authors propose an alternative MP shock identification approach to analyze the MP effects on the above-mentioned news components under a structural vector autoregression (SVAR) setup. Under this approach, one can apply an MP indicator in the SVAR, which helps forecast equity excess returns along with its external instruments for identification. Further, this study uses the various recently proposed measures of exogenous MP shocks and Fed information shocks as external instruments, and shows the different patterns of the news components' responses depending on the information in the applied instruments.
Highlights
An unexpected drop in equity excess returns may be attributed to a decline in expected future dividends, an increase in future real interest rates or an increase in future risk premium
To analyze the components that derive an unexpected change in the equity excess returns, Campbell and Ammer (1993) used a log-linear approximation and decomposed unexpected equity excess returns into the three news components; they estimated the components using a vector autoregression (VAR) setup [1]
This study provides an alternative approach to analyzing the responses of unexpected equity excess return news components to monetary policy (MP) shocks in an structural VAR (SVAR) setup
Summary
An unexpected drop in equity excess returns may be attributed to a decline in expected future dividends, an increase in future real interest rates or an increase in future risk premium. To analyze the components that derive an unexpected change in the equity excess returns, Campbell and Ammer (1993) used a log-linear approximation and decomposed unexpected equity excess returns into the three news components (i.e. risk premium news, real interest rate news and cash-flow news components); they estimated the components using a vector autoregression (VAR) setup [1]. Patelis (1997) used a structural VAR (SVAR) setup, wherein the endogenous state variables include MP indicator variables [2], and applied the Choleski decomposition (i.e. zero short-run restriction) to identify MP shocks. Bernanke and Kuttner (2005) assumed no MP indicators in the (endogenous) state variables in their reduced-form VAR model [3], but added an MP surprise measure as an exogenous variable.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: Journal of Derivatives and Quantitative Studies: 선물연구
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
