Reaction of Stock Market to Monetary Policy Surprises

This paper provides an empirical analysis of stock market reactions to monetary policy surprises. Its principal objective is to understand the heterogeneous nature of this type of response by examining a set of possible explanatory factors. I find that a hypothetical unanticipated increase of 25 bps in the target Federal Reserve funds rate would result in a one-day decline of 1.3 percent in the prices of S&P 500 stocks. There is some evidence that factors such as sector and industry groups, firm size, and the foreign earnings exposure of a firm could affect the reaction reflected in its stock price. The severity of the equity market?s response also appears to be associated with elements of the macroeconomic environment such as the level of prevailing interest rates and inflation expectations. Moreover, my results suggest that a lack of unanimity in the FOMC votes could curb the reaction of the stock market