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Non-linear effects of monetary policy shocks on expected crosssectional stock returns under policy uncertainty: A panel smooth transition regression analysis
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2018 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

In this paper, I study the non-linear effects of monetary policy shocks on expected cross-sectional stock returns under different regimes of policy uncertainty in the United States. Monetary policy shocks are obtained by calculating the unexpected changes in the Federal funds rate on days of Federal Open Market Committee (FOMC) meetings. The effects of monetary policy shocks on expected cross-sectional stock returns are studied in an Intertemporal Capital Asset Pricing Model (ICAPM). To allow for nonlinearity in the model, the ICAPM is used in the framework of a panel smooth transition regression model (PSTR). This model allows the regressions coefficients to change smoothly over time when moving from one “extreme” regime to another. The crosssectional stock returns that are studied are the 25 size and book-to-market portfolio returns, the 25 size and momentum portfolio returns, the 12 industry portfolio returns and the 32 size, operating profitability and investment portfolio returns. The main results show that the effects of monetary policy shocks on expected crosssectional stock returns decrease under high economic policy uncertainty for all portfolios. However, the results of the robustness analysis confirm this conclusion only for the 25 size and book-to-market portfolios and the 32 size, operating profitability and investment portfolios.

Place, publisher, year, edition, pages
2018.
Keywords [en]
Monetary Policy, Cross-section of Stock Returns, Policy Uncertainty, ICAPM, Panel Smooth Transition Regressions
National Category
Economics
Identifiers
URN: urn:nbn:se:uu:diva-356960OAI: oai:DiVA.org:uu-356960DiVA, id: diva2:1237631
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Available from: 2018-08-09 Created: 2018-08-09 Last updated: 2018-08-09Bibliographically approved

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