The Impact Of Monetary Policy Innovation On Stock Returns

Along with the academic consensus on the non-neutrality (at least in the short term) of money, central banks are playing increasingly prominent role in the macroeconomic regulation in many countries. At the same time, the study about the impact of monetary policy on economy has become one of the core issues of macroeconomic research. Because of the characteristics of flexible and reversible, monetary policy has an incomparable advantage in the process of prudent macro-economic management. However, related researches have shown that, the tools of monetary policy have no direct effect on the ultimate goal of monetary policy, and the financial markets play the intermediary role in the regulation process. The stock market is one of the most important financial markets, and it surely has a significant impact on the transmission of monetary policy. So it is very important to study the relationship between monetary policy and stock returns. The study has theoretical as well as practical significance. The purpose of this paper is to analyze the impact of monetary policy operation on stock returns in China from an empirical point of view.With Chinese inter-bank bond repo rate, this article generates a new proxy of monetary policy from the factor model. Based on this proxy, it uses the event study approach to analyze the immediate impact of the monetary policy innovation on the stock returns. Then, it analyzes the long-term effects of the monetary policy innovation and its dynamic process using a SVAR model.The empirical studies show that, the monetary policy innovation (i.e., the non-expected monetary policy) has a significant effect on stock returns in Chinese market. The non-expected tightening monetary policy will lead the stock price to decline. Meanwhile, the non-expected expansionary monetary policy can improve the stock yields. It can be proved that, the impact of monetary policy innovation has nothing to do with the change of profitability of listed companies in financial industry.Compared to stocks in Shanghai Stock Exchange, stocks in Shenzhen Stock Exchange are more sensitive to monetary policy shock. Among them, stocks in small and medium-sized enterprises board have the greatest response. At the same time, the response of listed corporations in different stages of the production and consumption exhibit slightly difference. Further studies show that, the impact of monetary policy innovation to stocks in different industries is significantly different. Stocks in pro-cyclical industries have stronger response than stocks in other industries. And this asymmetric phenomenon can not be explained by the risk factor from CAPM model. In addition, the impact of monetary policy innovation varies with the difference of regulatory environment and concrete content of monetary policy. But this effect is not statistically significant.From the time series analysis, we can know that, the non-expected tightening monetary policy can cause the stock returns to significantly decrease contemporaneously and in the subsequent 2 months, but the impact will reversal in the third month. Overall, the impact of monetary policy innovation can only explain a very small part of the volatility of stock returns.The main innovation of this paper is to generate the proxy of monetary policy shocks from the inter-bank bond repo rate by using the factor model. And taking advantage of discreteness of the deposit reserve rate policy and the interest rate policy, this paper analyzes the immediate impact of monetary policy to stock returns. In time series analysis, endogenous variable selection and model structure of the SVAR model of are more in line with the traditional mainstream research abroad.The research of this paper is of great significance in both academic research and practical application. From the academic point of view, our empirical analysis can provide a reference for the selection of macro economy theories. And from the practical point of view, the robust results can provide guidance for the choice of monetary policy tools.