Deep Learning Tools for Predicting Stock Market Movements

9Stock Returns and Monetary Policy

Baki Cem Şahin

Central Bank of Türkiye, İstanbul, Türkiye

Abstract

The impact of monetary policy decisions on stock returns has attracted significant attention from policymakers, academicians, and investors. This study aims to analyze the relationship between monetary policy and stock returns using an event study methodology. The results demonstrate that unexpected changes (surprises) in monetary policy decisions have an impact on stock returns in the opposite direction, indicating the significance of monetary policy actions in influencing stock market performance. Moreover, we find that the impact of monetary policy on stock returns is higher during periods of increased market uncertainty emphasizing the importance of market conditions when assessing the relationship between monetary policy decisions and stock returns. We extended the analysis further by using individual stock returns and this provides valuable insights into the relationship between monetary policy and stock returns compared to the studies using stock index data and thereby aggregated information. The individual stock-based analysis shows that the impact of monetary policy on stock returns is not uniform across sectors. Varying responses to monetary policy changes among sectors underscore the importance of a sector-specific approach when evaluating the effects of monetary policy on stock market performance. Furthermore, we investigate the role of financial constraints by ...