The Fed and the stock market: a tale of sentiment states

Guo, H., Hung, C.-H. D. and Kontonikas, A. (2022) The Fed and the stock market: a tale of sentiment states. Journal of International Money and Finance, 128, 102707. (doi: 10.1016/j.jimonfin.2022.102707)

Abstract

We analyze the period before the zero lower bound and show that the state of investor sentiment strongly affects the transmission of monetary policy to the stock market. The impact of Federal funds rate (FFR) surprises is mostly potent when sentiment-driven overvaluation is followed by a correction, whereby the stock market increases by 0.8% in response to an unexpected FFR cut of 10 basis points. Our findings suggest that monetary easing surprises during sentiment-waning phases boost the stock market by alleviating investors’ fear. The ability of sentiment to drive the observed state dependence is hard to reconcile with rational pricing.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Guo, Haifeng and Kontonikas, Professor Alexandros and Hung, Dr Daniel
• Authors: Guo, H., Hung, C.-H. D., and Kontonikas, A.
• College/School: College of Social Sciences > Adam Smith Business School; College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Journal of International Money and Finance
• Publisher: Elsevier
• ISSN: 0261-5606
• ISSN (Online): 1873-0639
• Published Online: 09 July 2022
• Copyright Holders: Copyright © 2022 The Authors
• First Published: First published in Journal of International Money and Finance 128: 102707
• Publisher Policy: Reproduced under a Creative Commons License