The impact of monetary policy on stock returns in the United States of America

Abstract

Covid 19 pandemic has caused changes in the scale level of the business, the economical and the financial uncertainty and excessive damages around the world. This study analyzes the impact of monetary policy on the equity market return in the USA. The aim of this research is to identify the effect of the monetary policy on the S&P500 Index, as well as the magnitude of the impact of the Covid 19 pandemic. To find these effects, a VECM model is developed after cointegration among the variables. The period of the analysis started from the 1st of January 1980 and ended up to 31st of December 2022. Due to fact that in this period has happened several and crucial crises, then it divided into subperiods. These sub-periods did not include any significant event that would affect the S&P 500 returns. Overall, the econometric results indicate a negative and statistically significant impact of the CPI on the S&P500 Index. In addition, a positive and statistically significant impact of the M_3 on the stock market returns. Furthermore, for better understanding of the effect of Covid 19 pandemic, this analysis was also applied to the period of the spread of the pandemic. Finally, for the effect of Covid 19 pandemic, the PR variable has been used. The results showed that the PR variable has a negative and statistically significant effect on the equity market return.