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Keywords:

  • E52;
  • E32;
  • G10
  • monetary policy;
  • stock returns;
  • Markov-switching

This paper investigates whether monetary policy has asymmetric effects on stock returns using Markov-switching models. Different measures of a monetary policy stance are adopted. Empirical evidence from monthly returns on the Standard & Poor's 500 price index suggests that monetary policy has larger effects on stock returns in bear markets. Furthermore, it is shown that a contractionary monetary policy leads to a higher probability of switching to the bear-market regime.