UC Riverside

Chapter one investigates the asymmetric effects of monetary policy on the U.S. stock market across different monetary policy regimes and stock market phases. It uses a Markov-switching dynamic factor model to date the turning points of each bear market and bull market, and to generate a new stock market movement measure. A time-varying parameter analysis is then used to study the contemporaneous and lead-lag effects of monetary policy on stock returns. The results provide evidences that the monetary policy of changing monetary aggregates has fewer impacts in bear markets than bull markets, but changes in federal funds rate can be more influential in bear markets. The results also indicate that increases in monetary aggregates or reductions in the federal funds rate have positive contemporary impacts on stocks only during the periods in which they are used as the monetary policy intermediate target.

Chapter two (joint with Dr. Marcelle Chauvet) investigates the overall interrelationship between monetary policy and stock returns. Using a Markov-switching dynamic bi-factor model, the chapter extracts a latent factor from monetary variables to represent changes in monetary policy, and a second latent factor from stock indices to represent stock market movements. These unobserved factors as well as their relationship with each other are estimated simultaneously in a joint nonlinear model from the observable variables. The two factors are allowed to follow different two-state Markovswitching process. The factors are set in a bivariate vector autoregression framework to examine the dynamic relationship. The results indicate that contractionary monetary policy has a negative effect on stock returns, but monetary policy doesn't respond to changes in stock returns.

Chapter three investigates the reason why Hong Kong's foreign exchange reserves increase dramatically, and particularly studies the effects of monetary policy. Cointegration test, Granger causality test, and vector error correction model are employed. The results show a negative long-run relationship between money supply and foreign exchange reserve, and no long-run relationship between exchange rate and foreign exchange reserve. The results indicate a low speed of adjustment of the foreign exchange reserve departure from its long-run equilibrium is the reason for its large holdings.