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Stock Return Predictability and The Role of Monetary Policy
Author(s) -
PATELIS ALEX D.
Publication year - 1997
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1997.tb02747.x
Subject(s) - predictability , economics , stock (firearms) , monetary policy , monetary economics , risk premium , econometrics , financial economics , excess return , mathematics , statistics , mechanical engineering , paleontology , context (archaeology) , biology , engineering
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).