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.
UK Stock Returns and the Impact of Domestic Monetary Policy Shocks
Article first published online: 8 FEB 2007
Journal of Business Finance & Accounting
Volume 34, Issue 5-6, pages 872–888, June/July 2007
How to Cite
Bredin, D., Hyde, S., Nitzsche, D. and O'reilly, G. (2007), UK Stock Returns and the Impact of Domestic Monetary Policy Shocks. Journal of Business Finance & Accounting, 34: 872–888. doi: 10.1111/j.1468-5957.2006.02001.x
- Issue published online: 8 FEB 2007
- Article first published online: 8 FEB 2007
- (Paper received October 2005, revised version accepted September 2006. Online publication February 2007)
- monetary policy;
- stock market;
- interest rates
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.