Abstract
On the basis of 100 monetary policy announcements made by the U.S. Federal Reserve between 1994 and 2005, we estimate the reaction of the hotel and restaurant industry stock values to the Fed’s monetary policy actions. We find that the portfolios of hotel industry stocks react strongly to unexpected changes in the Federal Funds Target Rate. Specifically, for a hypothetical surprise 25-basis-point rate cut, the value-weighted hotel industry stock portfolio registers a one-day gain of 245 basis points (or 2.45 percent). This response is 78 percent stronger than that of the overall equity market in the United States. On the other hand, the restaurant industry is not as responsive to the unexpected changes in the monetary policy. When the Federal Reserve announces a reversal of monetary policy in either direction, hotel industry stocks react more strongly than do others.
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