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MONETARY POLICY INDICATORS AS PREDICTORS OF STOCK RETURNS
Author(s) -
Becher David A.,
Jensen Gerald R.,
Mercer Jeffrey M.
Publication year - 2008
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2008.00243.x
Subject(s) - predictability , monetary policy , stock (firearms) , economics , monetary economics , linkage (software) , business cycle , macroeconomics , mechanical engineering , biochemistry , chemistry , physics , quantum mechanics , gene , engineering
We explore the linkage between stock return predictability and the monetary sector by examining alternative proxies for monetary policy. Using two complementary methods, we document that failure to condition on the Fed's broad policy stance causes a substantial understatement in the ability of monetary policy measures to predict returns. Industry analyses suggest that cross‐industry return differences are also linked to changes in monetary conditions, as monetary policy has the strongest (weakest) relation with returns for cyclical (defensive) industries. Overall, we find that monetary conditions have a prominent and systematic relation with future stock returns, even in the presence of business conditions.