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Stock Returns Predictability And The Role Of Monetary Policy
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Book Synopsis Stock Returns Predictability and the Role of Monetary Policy by : Alex D. Patelis
Download or read book Stock Returns Predictability and the Role of Monetary Policy written by Alex D. Patelis and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper 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 auto-regressions, the paper concludes that monetary policy variables are significant predictors of future returns, though 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).
Book Synopsis Stock Return Predictability by : Alex D. Patelis
Download or read book Stock Return Predictability written by Alex D. Patelis and published by . This book was released on 2001 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Monetary Policy and Predictability of Stock Returns by : Padmini Dasgupta
Download or read book Monetary Policy and Predictability of Stock Returns written by Padmini Dasgupta and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In view of the shifting importance from banks to stock markets in India's financial sector, a growing view is that monetary policy should take into account its impact on stock markets alongside its traditional focus on the banking sector. With regard to this issue, we test for non-neutrality of monetary policy in affecting stock returns. Using the Vector Auto Regression (VAR) methodology, we find that growth in reserve money (as an indicator of monetary policy) granger-causes stock returns without any feedback effect. This is supported both by the traditional orthogonalized as well as the recently developed generalized forecast error variance decompositions where monetary policy accounts for most of the forecast error variance of stock returns. Our results also point towards the fact that the stock market in India is not efficient with respect to monetary policy in the semi-strong sense of Efficient Market Hypothesis.
Book Synopsis Stock Return Predictability with Taylor Rule Fundamentals by : Lei Jiang
Download or read book Stock Return Predictability with Taylor Rule Fundamentals written by Lei Jiang and published by . This book was released on 2015 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper evaluates in-sample and out-of-sample stock return predictability with inflation and output gap, the variables that typically enter the Federal Reserve Bank's interest rate setting rule. To examine the role of monetary policy fundamentals for stock return predictability, we introduce inflation and output gap into the Fed model that relates stock returns to earnings and long-term yields. Using real-time data from 1970 to 2008, we find evidence that in-sample and out-of-sample fit is much stronger for the Fed model with Taylor rule fundamentals than for the constant return model and the Fed model that does not include inflation and output gap. In addition to standard mean squared prediction error based out-of sample comparisons, we use entropy-based tests for nonparametric dependence and find evidence of nonparametric dependence of stock returns on Taylor rule fundamentals. Finally, we evaluate economic significance of the stock return models and find that the models with Taylor rule fundamentals produce higher utility gains than either the constant return model or the original Fed model. The findings are robust to the choice of the measure of economic activity, data frequency, and window size.
Book Synopsis Stock Return Predictability by : Arthur Ritter
Download or read book Stock Return Predictability written by Arthur Ritter and published by GRIN Verlag. This book was released on 2015-05-27 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: Research Paper (postgraduate) from the year 2015 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 17 (1,3), University of St Andrews (School of Management), course: Investment and Portfolio Management, language: English, abstract: Empirical evidence of stock return predictability obtained by financial ratios or macroeconomic factors has received substantial attention and remains a controversial topic to date. This is no surprise given that the existence of return predictability is not only of interest to practitioners but also introduces severe implications for financial models of risk and return. Founded on the assumption of efficient capital markets, research on capital asset pricing models has instigated this emergence of stock return predictability factors. Analysing these factors categorically, this paper will provide a balanced discussion of advocates as well as sceptics of stock return predictability. This essay will commence by firstly outlining the fundamental assumptions of an efficient capital market and its implications for return predictability. Subsequently, a thorough focus will be placed on the most significant predictability factors, including fundamental financial ratios and macroeconomic indicators as well as the validity of sampling methods used to attain return forecasts. Lastly this essay will reflect on the findings while proposing areas of further research.
Book Synopsis Stock Return Predictability in a Monetary Economy by : Abraham Lioui
Download or read book Stock Return Predictability in a Monetary Economy written by Abraham Lioui and published by . This book was released on 2010 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: In an economy where agents hold money, the short interest rate determines the trade-off between money holdings and consumption. Building on this idea, we develop a theoretical model that shows the transmission mechanism through which the short rate finds its way to stock-return predictability regressions.We construct a cointegration relation that links share prices and dividends to the short interest rate when we investigate empirically the main implications of our model. This relationship, that we denote the pdR-ratio, strongly predict stock returns and excess returns, even when the statistical significance of long-horizon return predictability is evaluated using Hodrick (1992) t-statistics. The result that stock returns and excess returns are predictable at long horizons is different from recent findings reported by Ang amp; Bekaert (2006). We differ from Ang amp; Bekaert (2006) by explicitly accounting for the non-stationarity of the predictors in a cointegration framework.Our theoretical model also suggests that aggregate output might be better suited as a scaling variable than dividends. As a consequence, we also build a cointegration variable that relates share prices, output, and the interest rate in a cointegration framework. We denote this variable the pyR-ratio. We show that the pyR-ratio strongly predicts stock returns and excess returns at long horizons. The pyR-ratio is also found to have some predictive power for dividend growth which the pdR-ratio does not. Neither the pyR-ratio nor the pdR-ratio have predictive power for output growth and the interest rate.
Book Synopsis Identifying the Interdependence Between US Monetary Policy and the Stock Market by : Hilde C. Bjørnland
Download or read book Identifying the Interdependence Between US Monetary Policy and the Stock Market written by Hilde C. Bjørnland and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (CEE 1999). We find great interdependence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 per cent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock increasing stock prices by one per cent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks.
Book Synopsis Monetary Policy and Common Stock Returns by : Donald C. Baron
Download or read book Monetary Policy and Common Stock Returns written by Donald C. Baron and published by . This book was released on 1973 with total page 304 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis On the Predictability of Stock Returns by : Shmuel Kandel
Download or read book On the Predictability of Stock Returns written by Shmuel Kandel and published by . This book was released on 1995 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: The predictability of monthly stock returns is investigated from the perspective of a risk-averse investor who uses the data to update initially vague beliefs about the conditional distribution of returns. The optimal stocks-versus-cash allocation of the investor can depend importantly on the current value of a predictive variable, such as dividend yield, even though a null hypothesis of no predictability might not be rejected at conventional significance levels. When viewed in this economic context, the empirical evidence indicates a strong degree of predictability in monthly stock returns.
Book Synopsis Stock Returns and the U.S. Dollar by : J. Christopher Hughen
Download or read book Stock Returns and the U.S. Dollar written by J. Christopher Hughen and published by . This book was released on 2015 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: The relation between the dollar's value and stock prices is controversial. Our analysis shows that returns were 2.6 times higher when the dollar was trending up versus down. Our key insight is that dollar trends should be evaluated in light of monetary policy. While stocks returns have been relatively high when the dollar was appreciating, the difference in returns under tight and loose monetary policies was 9%. When the dollar was in a downtrend, the difference in stocks returns under different monetary policies was 17%.
Book Synopsis Complex Systems in Finance and Econometrics by : Robert A. Meyers
Download or read book Complex Systems in Finance and Econometrics written by Robert A. Meyers and published by Springer Science & Business Media. This book was released on 2010-11-03 with total page 919 pages. Available in PDF, EPUB and Kindle. Book excerpt: Finance, Econometrics and System Dynamics presents an overview of the concepts and tools for analyzing complex systems in a wide range of fields. The text integrates complexity with deterministic equations and concepts from real world examples, and appeals to a broad audience.
Book Synopsis Expected Stock Returns and Variance Risk Premia by : Tim Bollerslev
Download or read book Expected Stock Returns and Variance Risk Premia written by Tim Bollerslev and published by . This book was released on 2007 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Monetary Policy Rules by : John B. Taylor
Download or read book Monetary Policy Rules written by John B. Taylor and published by University of Chicago Press. This book was released on 2007-12-01 with total page 460 pages. Available in PDF, EPUB and Kindle. Book excerpt: This timely volume presents the latest thinking on the monetary policy rules and seeks to determine just what types of rules and policy guidelines function best. A unique cooperative research effort that allowed contributors to evaluate different policy rules using their own specific approaches, this collection presents their striking findings on the potential response of interest rates to an array of variables, including alterations in the rates of inflation, unemployment, and exchange. Monetary Policy Rules illustrates that simple policy rules are more robust and more efficient than complex rules with multiple variables. A state-of-the-art appraisal of the fundamental issues facing the Federal Reserve Board and other central banks, Monetary Policy Rules is essential reading for economic analysts and policymakers alike.
Book Synopsis The Effectiveness of Monetary Policy Transmission Under Capital Inflows by : Ms.Sonali Jain-Chandra
Download or read book The Effectiveness of Monetary Policy Transmission Under Capital Inflows written by Ms.Sonali Jain-Chandra and published by International Monetary Fund. This book was released on 2012-11-02 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: The effectiveness of the monetary policy transmission mechanism in open economies could be impaired if interest rates are driven primarily by global factors, especially during periods of large capital inflows. The main objective of this paper is to assess whether this is true for emerging Asia’s economies. Using a dynamic factor model and a structural vector auto-regression model, we show that long-term interest rates in Asia are indeed predominantly driven by global factors. However, monetary policy transmission mechanism remains effective in the region, as it operates predominantly through short-term interest rates. Nevertheless, the monetary transmission mechanism, though effective, is somewhat weaker in Asia during the periods of surges in capital inflows.
Book Synopsis Stock Return Predictability by : David G. McMillan
Download or read book Stock Return Predictability written by David G. McMillan and published by . This book was released on 2017 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper argues that the nature of stock return predictability varies with the level of inflation. We contend that the nature of relations between economic variables and returns differs according to the level of inflation, due to different economic risk implications. An increase in low level inflation may signal improving economic conditions and lower expected returns, while the opposite is true with an equal rise in high level inflation. Linear estimation provides contradictory coefficient values, which we argue arises from mixing coefficient values across regimes. We test for and estimate threshold models with inflation and the term structure as the threshold variable. These models reveal a change in either the sign or magnitude of the parameter values across the regimes such that the relation between stock returns and economic variables is not constant. Measures of in-sample fit and a forecast exercise support the threshold models. They produce a higher adjusted R-squared, lower MAE and RMSE and higher trading related measures. These results help explain the lack of consistent empirical evidence in favour of stock return predictability and should be of interest to those engaged in stock market modelling as well as trading and portfolio management.
Book Synopsis The Time Varying Effect of Monetary Policy Surprise on Stock Returns by : Dennis W. Jansen
Download or read book The Time Varying Effect of Monetary Policy Surprise on Stock Returns written by Dennis W. Jansen and published by . This book was released on 2015 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the time varying effects of monetary policy on the stock returns in order to capture changes in the effectiveness of monetary policy over time. We find that a one percentage point surprise federal funds rate increase decreases the one-day stock return by 1.33% during the period 1989 to 2000, and by 7.47% during the period 2001 to 2007, i.e., over five times more. Also, surprises of monetary policy announcements do not have significant effects on the stock returns for most of the 1990s, but have significant effects during the 2000s. The significant period coincides with higher transparency and greater efforts from the Federal Reserve to communicate with the public, especially in the grounds of future policy, i.e., forward guidance. Higher transparency could increase the effectiveness of monetary policy. At the same time, the insignificant period coincides with the period of stock prices' bubble. Recent work (Gali, 2014; Gali and Gambetti, 2015) has suggested that monetary policy might be ineffective during periods of bubbles. In order to distinguish between the two explanations, we explore the evolution effect of monetary policy surprise on bond returns. We find uniform response of bond returns before and after the 2000s. Thus, we conclude that our finding of low monetary policy effectiveness during the 1990s is specific to the stock market, making the theory of rational bubbles the prevailed explanation.
Book Synopsis Strategic Asset Allocation by : John Y. Campbell
Download or read book Strategic Asset Allocation written by John Y. Campbell and published by OUP Oxford. This book was released on 2002-01-03 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt: Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
