Unconventional monetary policy and the stock market's reaction to Federal Reserve policy actions

Abstract

We examine the change in the effect of Federal Reserve's policy actions on stock returns after the Fed started to use unconventional policy actions. We find that the response of stock returns to monetary policy actions are almost seven times higher after the federal funds rate hit the zero lower bound. We conduct additional analysis to examine the underlying causes of the increase in the impact of monetary policy actions of stock returns. We show that investors rebalance their portfolios towards equity after selling Treasury securities to the Federal Reserve during large scale asset purchases. (C) 2017 Elsevier Inc. All rights reserved.