The Impact of Unanticipated Monetary Policy Changes on Stock Prices

Abstract

This paper explores the relationship between monetary policy and the stock market. Using U.S. data for the period 1989- 2006, we find that an unexpected 25-baisis-point cut in the Federal Funds rate would lead to an average increase in the S&P 500 stock return of about 1.35%. A vector autoregression (VAR) model is then used to investigate the impact of monetary policy on equity prices through the channels of expected future excess equity returns and the real interest rate.