Stock Return Predictability and The Role of Monetary Policy

Abstract

This article examines whether shifts in the stance of monetary policycan account for the observed predictability in excess stock returns.Using long-horizon regressions and short-horizon vector autoregressions,the article concludes that monetary policy variables are significantpredictors of future returns, although they cannot fully account forobserved stack return predictability. I undertake variancedecompositions to investigate how monetary policy affects the individualcomponents of excess returns (risk-free discount rates, risk premia, orcash flows).