UK Stock Returns and the Impact of Domestic Monetary Policy Shocks

Authors

  • Don Bredin,

    1. The authors are respectively from University College Dublin; University of Manchester; City University; and Central Bank and Financial Services Authority of Ireland.
    Search for more papers by this author
  • Stuart Hyde,

    1. The authors are respectively from University College Dublin; University of Manchester; City University; and Central Bank and Financial Services Authority of Ireland.
    Search for more papers by this author
  • Dirk Nitzsche,

    1. The authors are respectively from University College Dublin; University of Manchester; City University; and Central Bank and Financial Services Authority of Ireland.
    Search for more papers by this author
  • Gerard O'reilly

    Corresponding author
    1. The authors are respectively from University College Dublin; University of Manchester; City University; and Central Bank and Financial Services Authority of Ireland.
      * Address for correspondence: Don Bredin, School of Business, University College Dublin, Blackrock, Dublin, Ireland.
      e-mail: don.bredin@ucd.ie
    Search for more papers by this author

  • They would like to thank Ken Kuttner for sharing his data and an anonymous referee for helpful comments and suggestions. The views expressed here are the author's own and do not necessarily reflect the views of the ESCB or the staff of the Central Bank of Ireland.

* Address for correspondence: Don Bredin, School of Business, University College Dublin, Blackrock, Dublin, Ireland.
e-mail: don.bredin@ucd.ie

Abstract

Abstract:  We investigate the influence of changes in UK monetary policy on UK stock returns and the possible reasons behind such a response. Firstly, we conduct an event study to assess the impact of unexpected changes in monetary policy on aggregate and sectoral stock returns. The decomposition of unexpected changes in the policy rate is based on futures markets data. Secondly, using a variance decomposition in the spirit of Campbell (1991) we attempt to identity the channels behind the response of stock returns to monetary policy surprises. The variance decomposition results indicate that the monetary policy shock leads to a persistent negative response in terms of future excess returns for a number of sectors.

Ancillary