Monetary policy and stock returns: Financing constraints and asymmetries in bull and bear markets

Article history: Received 18 September 2009 Received in revised form 21 July 2010 Accepted 11 August 2010 Available online 18 August 2010 We examine asymmetries in the impact of monetary policy surprises on stock returns between bull and bear markets in the period 1994 to 2005. We ask how these impacts respond to the relative ability of firms to obtain external finance. We find that the impact of a surprise monetary policy in a bear market is large, negative, and statistically significant, and this holds across size decile portfolios. The impact of a surprise policy action in a bear market for most industries is significantly greater than the impact of surprise monetary policy in a bull market. Controlling for the capacity for external finance, stock returns of firms in bear states respond more than firms in bull states. Capacity for external finance is more important in a bear market, as it partially mitigates the larger impact of monetary policy in a bear market. © 2010 Elsevier B.V. All rights reserved.