Asset prices and federal funds rate shocks: the 2007-2009 financial crisis

HG Finance

Saggu, Aman ; MacDonald, Ronald

University:University of Glasgow

Department:Adam Smith Business School

关键词: HG Finance;   

Others  :  http://theses.gla.ac.uk/4916/1/2014sagguphd.pdf

来源: University of Glasgow

【 摘 要 】

This empirically motivated doctoral thesis investigates the impact of Federal Funds rate (FFR) surprises on asset prices between Jun-89 to Dec-12, with a focus on the effect of the 2007-2009 financial crisis on this relationship. This is an important question to evaluate because the Fed initially responded to the crisis by using conventional monetary policy (i.e. target FFR cuts) to influence financial, monetary and economic conditions in the broader macroeconomy. This was also the primary policy tool of the Fed throughout the majority of the crisis period (Sep-07 to Dec-08) and non-conventional monetary policy measures were only used when the target FFR approached the zero-lower bound. In Chapter 1 we outline the thesis and in Chapter 2 we review empirical studies related to this thesis.Chapter 3 is the first empirical chapter of this thesis in which we investigate the impact of FFR surprises on US stock returns. We demonstrate that a structural shift occurred during the recent crisis which significantly altered the US stock market response to FFR shocks. In particular, stock returns were shown to be associated with non-positive or negative responses to unexpected FFR cuts during the crisis. The lack of a positive stock response to FFR shocks during the crisis implies that unexpected FFR cuts ceased to be seen as good news by stock market investors, and were rather interpreted as signals from the Fed of worsening macro-financial conditions.We extend our empirical analysis to the US Treasury market and gold market in Chapter 4. Our estimates show that very short-term maturity (3-Month), longer-term (5-Year, 10-Year and 30-Year) maturity Treasury yields and gold returns were associated with significantly larger magnitude declines in response to unexpected FFR cuts during the crisis. The stronger response of these securities to FFR shocks during the crisis implies that unexpected FFR cuts signalled worsening future economic prospects and triggered a rebalancing of investment portfolios away from falling equities and towards these safe-haven assets. These cuts prompted significantly higher demand for highly liquid securities such as 3-Month T-Bills and gold. The stronger response of longer-term Treasuries implies that investors anticipated a prolonged downturn and increased demand for longer-term, lower-risk, safe-haven assets.Finally in Chapter 5 we consider the international context, investigating the transmission of FFR shocks to equity indices across 43 advanced and emerging market countries. We find substantial cross country heterogeneity in the responses of foreign equity index returns to FFR shocks outside the crisis, with positive stock responses to FFR shocks where significant. However, we find even greater heterogeneity in the responses of foreign equity indices to FFR shocks during the crisis, with an unexpected 1% FFR cut being associated with significant 2.53%-7.50% decline across the equity indices of 12 countries, and 2.79%-14.04% increases across the equity indices of 19 countries. Our estimates show that cross country heterogeneity in equity market responses to FFR shocks during the crisis period can only partly be explained in terms of real bilateral integration with the US economy, and find that external borrowing from the rest of the world is also an important determinant. Overall, our estimates in this thesis highlight the severity of the 2007-2009 crisis, reveal the limits of conventional monetary policy at the zero lower bound and are consistent with the Keynesian liquidity trap theory.