This paper examines the dynamic linkages between the federal funds rate and the stock market during the 1970–2004 period using the VAR methodology. We detected a disconnection between Fed actions and market responses in the 1990s relative to the 1970s and 1980s. Upon further analyses, we observed asymmetric effects of monetary policy actions on the stock market and that such actions were more turbulent during bear markets than bull markets. Overall, our results appear to suggest that there was consistent dynamic relationship between the conduct of monetary policy and the corresponding behavior by the stock market during the last three decades.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Dec 17, 2009
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