UK Stock Returns and the Impact of Domestic Monetary Policy Shocks

Abstract

We investigate the influence of changes in UK monetary policy on UK stock returns and the possible reasons behind such a response. Firstly, we conduct an event study to assess the impact of unexpected changes in monetary policy on aggregate and sectoral stock returns. The decomposition of unexpected changes in the policy rate is based on futures markets data. Secondly, using a variance decomposition in the spirit of Campbell (1991) we attempt to identity the channels behind the response of stock returns to monetary policy surprises. The variance decomposition results indicate that the monetary policy shock leads to a persistent negative response in terms of future excess returns for a number of sectors. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

European monetary policy surprises: the aggregate and sectoral stock market response

“…Andersen et al (2004) and Fatum and Solnik (2003) have explored the impact of surprise changes in the US policy rate on various exchange rates, while Bernanke and Kuttner (2005), and Rigobon and Sack (2003) have all examined how the US policy rate changes affect the US stock market. Bredin et al (2007) document similar findings for the impact of the UK monetary policy surprises on the UK stock market.…”

Stock market response to monetary and fiscal policy shocks: Multi-country evidence

“…Authors such as Bohl, Siklos and Sondermann (2008) and Kholodilin, Montagnoli, Napolitano and Siliverstovs (2009) With reference to the UK, evidence suggests that there is a strong negative influence of contractionary monetary policy on stock market performance. According to Bredin, Hyde, Nitzsche and O'Reilly (2007), changes in the UK policy rate have a negative and statistically significant effect on FTSE returns. For a thorough explanation of movements in UK's stock returns in connection with monetary policy decisions the reader is directed to the empirical work of Cuthbertson, Hayes and Nitzsche (1999).…”

Monetary Policy and Stock Markets: Evidence from EU Countries

“…Hussain (2010) Vithessonthi and Techarongrojwong (2012) demonstrate that changes in the monetary policy have an impact on stock prices and that these respond negatively to the expected change in the repurchase rate in the context of Thailand. On this topic there exist numerous studies which embrace the idea that monetary policy actions are associated with changes in stock prices (Bredin et al, 2007;Konrad, 2009). In contrast with the result obtained for U.S. and Thailand, the empirical findings of Bohl et al (2007) show a generally low relationship between German market index return and interest rates on short term, in 1985-1998.…”