The Impact of Monetary Policy on the U.S. Stock Market since the COVID-19 Pandemic

Round 1

Reviewer 1 Report (Previous Reviewer 1)

The revision has adressed the issues raised in the first report. The quality of the paper has thereby improved substantially.

Reviewer 2 Report (Previous Reviewer 2)

My comments have been taken into account. I am fine with the revised version and recommend the article to be published, after final proof reading.

English is fine in my opinion

This manuscript is a resubmission of an earlier submission. The following is a list of the peer review reports and author responses from that submission.

Round 1

Reviewer 1 Report

The author estimates a monetary policy beta by using a regression approach (eq (3)). Thereby, monetary policy surprises are based a pca approach using eurodollar futures over a 30 minutes bracket. 

1) Return frequencies and monetary policy surprises (MPS) frequencies seem to be different. These should be aligned.

2) There are alternative MPS proxies, such as Fed Fund Futures. As a robustness test, these should be added. Using Fed Fund Futures has an additional advantage: they need not to be estimated by a pca appraoch.

3) The monetary policy beta may be just another proxy for a discount rate beta (see for example "Bad Beta, Good Beta" JOHN Y. CAMPBELL AND TUOMO VUOLTEENAHO (2004), American Economic Review, pp. 1249ff). The author should explore a potential relationship between the monetary policy beta and a discount rate beta.

4) Table 4 does not include the monetary policy beta for the market portfolio. This should be included. Then, the market's premium for MPS is just beta(market) times average (MPS). 

5) It is unclear how the second goal of the paper (changing perceptions) is analyzed. The argument on p. 5 is based on purchases and sales of investors and a potential impact on prices. However, since for each buyer there is also a seller in the market. I do not understand this argument. The author should, therefore, clarify how the second goal is analzed.

6) Figure 1 could be added by including the values for the market portfolio (not only the average of 40 industries). In addition, it is not clear why the author does not show all months. 

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

Reviewer 2 Report

This paper explores how monetary tightening as a reaction to the unprecedented increase of inflation affected the US excess stock market returns using the Bauer and Swanson (2022) monetary policy surprises and macroeconomic variables over the 1988 to 2019 period. In a second step, monetary policy betas are used to estimate the beliefs of investors about monetary policy between 2020 and 2023. Based on iterative regression approach with time varying coefficients, the perceptions of investors about monetary policy have changed over the recent period. This has broadened uncertainty and contributed to stock market volatility.

This paper is certainly of interest for many readers, well written and rather easy to read. However, some improvements can even improve the analysis. First, the set of macroeconomic series could be enhanced by pandemic related variables, such as the number of infections or fiscal policy action to combat the recession attributed to the disease, such as financial support to low income households. Moreover, soaring energy prices and intensified tensions on the supply side like shocks to global value chains added to the recent inflation experience and influenced inflation expectations subsequently. If the variables are affected by these measures, the perceptions on the course of monetary policy can be affected. Second, the authors should clarify whether the change in monetary policy perceptions is significant or not (Figure 1). Third, core inflation might be a better proxy for the longer-lived increase in prices compared to headline inflation in consumer prices. The authors can discuss whether their results remain robust in this context (in a footnote).

Appropriate

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

Reviewer 3 Report

The question examined in this paper is timely and important, and the results are intuitively appealing. I have only one minor comment.

You wrote that: “The left-hand side variables include the excess returns (realized returns minus returns on one-month Treasury bills) on 53 assets. These assets are primarily returns on industry stock portfolios.” I think it is useful to provide more information on how these portfolios are constructed. For example, do you start with all the stocks that are traded on the NYSE or NASDAQ and divide them into portfolios according to the SIC codes? Or do you construct the portfolios in other ways?

Author Response

Please see the attachment.

Author Response File: Author Response.pdf