The Relationship Between the Negative Monetary Policy and Stock Market: Evidence from Changes in S&P 500

Abstract

Monetary policy and stock price are two significant factors in financial markets. They can influence each other through economic variables such as the interest rate. Researchers require to understand their dynamic relationship to better analyze the market while investors should put emphasis on the two factors interaction to minimize the investment risk. This paper studies the relationship between the change in monetary policy and the stock price in the U.S. market under the background of the Federal Reserves rate hike. The researcher mainly uses the S&P 500 retrieved from the website of investing and applies the ARIMA model in Stata to estimate the fitted value of the stock price. As a result, an apparent relationship between the Federal Reserves rate hike and the stock price is observed. However, the result is slightly different from the researchers original assumption; therefore, two assumptions are presented to explain the difference. One of the most important findings of this research is that the effect of the Federal Reserves rate hike is becoming more and more obvious in the long run.