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Stock Market's Reaction to Money Supply: A Nonparametric Analysis

Taamouti, A.

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Abstract

We empirically investigate the link between monetary policy measures and stock market prices. We document the following stylized facts about stock market’s reaction to money supply and examine the effect across the entire distribution of stock returns. Using a nonparametric Granger causality in mean test, we find that money supply has no impact on stock prices, which confirms many of the existing results that were based on linear mean regression. By contrast, when a nonparametric causality in distribution (hereafter general Granger causality) test and quantile regression based test were used, the effect of money becomes apparent and statistically very significant. Interestingly, money supply affects the left and right tails of stock return distribution but not its center. This might indicate that the monetary policy measure money supply is effective only during recessions and expansions. We have also investigated the extent to which the impact of money supply on stock returns detected by the nonparametric and quantile regression based tests can be attributed to a time-varying conditional variance of stock returns. After controlling for volatility persistence in stock returns, we continue to find evidence for the reaction of conditional distribution of stock market returns to money supply growth rate.

Citation

Taamouti, A. (2015). Stock Market's Reaction to Money Supply: A Nonparametric Analysis. Studies in Nonlinear Dynamics & Econometrics, 19(5), 669-689. https://doi.org/10.1515/snde-2013-0059

Journal Article Type Article
Online Publication Date Oct 30, 2014
Publication Date Dec 1, 2015
Deposit Date Oct 16, 2014
Publicly Available Date Mar 28, 2024
Journal Studies in Nonlinear Dynamics and Econometrics
Print ISSN 1081-1826
Publisher De Gruyter
Peer Reviewed Peer Reviewed
Volume 19
Issue 5
Pages 669-689
DOI https://doi.org/10.1515/snde-2013-0059
Keywords Granger causality in quantile, Money supply, Nonparametric Granger causality in distribution, Nonparametric Granger causality in mean, Stock prices.
Public URL https://durham-repository.worktribe.com/output/1443750

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Advance online version The final publication is available at www.degruyter.com.


Published Journal Article (Final published version) (2 Mb)
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