Stock Return Predictability and The Role of Monetary Policy

Authors

  • ALEX D. PATELIS

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    • Princeton University. I thank Ben Bernanke, Charles Jones, Burton Malkiel, René Stulz (the editor), an anonymous referee, and seminar participants at Princeton for useful comments and suggestions.


ABSTRACT

This article examines whether shifts in the stance of monetary policy can account for the observed predictability in excess stock returns. Using long-horizon regressions and short-horizon vector autoregressions, the article concludes that monetary policy variables are significant predictors of future returns, although they cannot fully account for observed stock return predictability. I undertake variance decompositions to investigate how monetary policy affects the individual components of excess returns (risk-free discount rates, risk premia, or cash flows).

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