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Monetary Policy and the Cross-Section of Equity Returns: Small versus Large and Value versus Growth

By Paulo Maio and José Tavares


This paper analyzes the effects of monetary policy shocks over the cross-section of equity returns, differentiating between small and large stocks and value versus growth stocks. Using three different proxies for monetary policy, our results document a contemporaneous impact of changes in the Federal Funds rate that is significantly larger for the returns of small stocks relative to large stocks, and for value stocks relative to growth stocks. In addition, we find that the dispersion in the responses to monetary shocks is mostly explained by the effects on portfolio cash flow news, rather than portfolio discount rate news. We document the dispersion of the impact of monetary shocks on industry returns, with industries that experience stronger responses generally tilted toward smaller firms and value firms. In an asset pricing cross-sectional framework, monetary factors are priced, and to some degree measure the same risks as the Fama and French (1993) factors, although they also contain explanatory power that is not related to those factors

Topics: rate, Fed, Size and book-to-market, Asset pricing, Linear multifactor models, Predictability of returns, Fama-French factors, industry returns, cash ‡ow news, discount rate news
Year: 2007
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