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The impact of monetary policy shocks on the equity risk premium before and after the Quantitative Easing in the United Kingdom

Sunil Poshakwale
BCom, DCMA, MBA, Ph.D. (Manchester), Professor of International Finance, Director of Centre for research in Finance, School of Management Cranfield University, UK
Pankaj Chandorkar
Doctoral Researcher, Centre for research in Finance, Cranfield School of Management, UK.
. (29 DEC 2016).


The authors investigate the impact of structural monetary policy shocks on ex-post equity risk premium (ERP) of aggregate and sectoral FTSE indices and 25 Fama-French style value-weighted portfolios. They find that monetary policy shocks negatively affect the ERP but at the sectoral level, the magnitude of the response is heterogeneous. Further, monetary policy shocks have a significant negative (positive) impact on the ERP before (after) the implementation of quantitative easing (QE). The empirical evidence provided in the paper sheds light on the equity markets asymmetric response to the BoEs policy before and after the monetary stimulus.

Keywords: monetary policy, equity risk premium, quantitative easing, monetary policy shocks, structural vector autoregression, Bank of England, Taylor monetary policy rule, unconventional monetary policy, output gap, inflation gap, Okuns law.
JEL Classification: E5, E30, G0, G1.