(zojuist gepubliceerd in The International Journal of Central Banking)
Sylvester Eijffinger (a), Ronald Mahieu (b) and Louis Raes (c)
This paper analyzes the impact of U.S. central bank communication on individual stock returns. We find a strong conditional effect of communication on stocks. The response of equities to central bank talk depends critically on the business cycle. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion, the effect is weaker and on average negative. The impact of central bank communication on stock prices displays similar cross-sectional variation as central bank actions. Cyclical industries are found to be more sensitive to central bank communication. We find that the stock prices of firms which have low cash flows, low returns to assets or equity, very high or low debt levels, small size, or which use more trade credit are affected more by central bank communication. Our evidence suggests that central bank communication by the Federal Open Market Committee has an impact on stocks and provides additional evidence for the demand and the credit channel.
a CentER and European Banking Center, Tilburg University, CEPR
b CentER and Netspar
c CentER and European Banking Center, Tilburg University