The Validity of the Event-study Approach: Evidence from the Impact of the Fed's Monetary Policy on US and Foreign Asset Prices
Version of Record online: 27 AUG 2009
© 2009 The London School of Economics and Political Science
Volume 78, Issue 311, pages 429–439, July 2011
How to Cite
ROSA, C. (2011), The Validity of the Event-study Approach: Evidence from the Impact of the Fed's Monetary Policy on US and Foreign Asset Prices. Economica, 78: 429–439. doi: 10.1111/j.1468-0335.2009.00828.x
- Issue online: 27 AUG 2009
- Version of Record online: 27 AUG 2009
- Final version received 22 April 2009.
This paper documents the effects of changes in US monetary policy on asset prices in 51 countries to evaluate the validity of the event-study approach. We find that the event-study estimates contain a significant bias. However, this bias is fairly small and the ordinary least squares approach tends to outperform in an expected squared error sense the heteroscedasticity-based estimator for both small and large sample sizes. Hence in general the event-study methodology should be preferred. Moreover, we show that US monetary policy has been an important determinant of global financial markets.