1 The Impact of Monetary Policy on Stock Prices Christos Ioannidis a and Alexandros Kontonikas b* a School of Management, University of Bath, Bath, UK b Department of Economics, University of Glasgow, Glasgow, UK Abstract This paper investigates the impact of monetary policy on stock returns in thirteen OECD countries over the period 1972-2002. Our results indicate that monetary policy shifts significantly affect stock returns, thereby supporting the notion of monetary policy transmission via the stock market. Our contribution with respect to previous work is threefold. First, we show that our findings are robust to various alternative measures of stock returns. Second, our inferences are adjusted for the non-normality exhibited by the stock returns data. Finally, we take into account the increasing co-movement among international stock markets. The sensitivity analysis indicates that the results remain largely unchanged. JEL classifications: E44; E52; E60 Keywords: Monetary policy; Asset prices September 2006 * Corresponding author: Dr Alexandros Kontonikas, Department of Economics, Adam Smith Building, University of Glasgow, Glasgow, G12 8RT, UK. Tel.: +44 (0)141 3306866. Fax: +44 (0)141 3304940. Email: a.kontonikas@lbss.gla.ac.uk 21. Introdu ction Monetary policy attempts to achieve a set of objectives that are expressed in terms of macroeconomic variables such as inflation, real output and employment. However, monetary policy actions such as changes in the central bank discount rate have at best an indirect effect on these variables and considerable lags are involved in the policy transmission mechanism. Broader financial markets though, for example the stock market, government and corporate bond markets, mortgag...
