Does the Equity Term Structure Respond to Monetary Policy Shocks?
A long-standing body of research, inspired by Bernanke and Kuttner (2005), has documented the effects of Fed interest rate surprises on stock markets. While stock markets provide valuable information about the investor risk premium and dividend growth expectations, researchers have only recently developed more comprehensive tools to estimate the term structure of equity risk premia and dividend…
A significant body of research has examined the impact of Federal Reserve interest rate surprises on stock markets, as inspired by Bernanke and Kuttner (2005). However, estimating the term structure of equity risk premia and dividend growth expectations across a wide range of maturities has been a recent development. This investigation utilizes the Giglio, Kelly, and Kozak (2024) model to analyze the effects of monetary policy shocks on short- and long-term estimates of risk premia and growth expectations.
Monetary policy shocks are typically measured using high-frequency identification techniques, such as Kuttner (2003) and Bernanke and Kuttner (2005), which focus on price changes in interest rate-linked futures contracts around FOMC announcements. Positive (negative) MPS values indicate hawkish (dovish) policy surprises. The Federal Reserve Bank of San Francisco's Monetary Policy Surprise dataset aggregates these shocks into a monthly series using Eurodollar futures from various maturities. The chart below illustrates the dynamics of these shocks over the past three decades.
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