Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/305547 
Year of Publication: 
2024
Series/Report no.: 
CESifo Working Paper No. 11305
Publisher: 
CESifo GmbH, Munich
Abstract: 
We show that the stock market price reaction to monetary policy surprises upon announcements of the Federal Open Market Committee (FOMC) is explained mostly by changes in the default-free term structure of yields, not by changes in the equity premium. We reach this conclusion based on a new model-free method that uses dividend futures prices to obtain the counterfactual stock market index price change that results purely from the change in the default-free yield curve induced by the monetary policy surprise. The yield curve change in turn partly reflects a change in expected future short-term interest rates, as measured by changes in professional forecasts, and partly a change in the term premium. We further find that the even/odd week FOMC cycle in stock index returns is also largely due to an FOMC cycle in the yield curve rather than the equity premium.
Subjects: 
monetary policy
equity premium
yield curve
dividend futures
term premium
JEL: 
G12
E52
Document Type: 
Working Paper
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