Monetary Policy Shocks and Security Market Responses

By
Roger Craine

University of California

Vance Martin
University of Melbourne

First Draft: June 2003
July 2004

Abstract: An old and unanswered question is: how does monetary policy work? This paper contributes
to a growing recent literature that tries to quantify the first step of the process. These studies use daily data
to estimate the response of security pricesbond yields and equity returnsto exogenous monetary policy
surprises. We extend the literature in three directions: (1) theory: we specify a general factor model in
which security prices respond to multiple sources of systematic riskmonetary policy surprises and other
market wide information shocksand idiosyncratic risk. (2) Empirical: we use all of the daily data while
other studies use a small sub-sample of less than 10% of the data. And (3) econometric: we estimate a
vector model and impose the over-identifying restrictions.

Our empirical results show that efficiently estimating a more general model leads to economically
important differences. Our results solve a puzzle and highlight an important neglected short-run channel of
monetary policy. Cochrane and Piazzesi (2002), the latest of many, found that long maturity bond yields
increase in response to a surprise tightening in monetary policya result they properly label a puzzle. Our
results eliminate the puzzle. The yield curve response to a monetary surprise displays the classical textbook
patternshort maturity yields rise and long maturity yields do nothing. Common information shocks,
which most other studies omit, have a level effect on the yield curveall yields increase in response to a
positive shock. We also find that the equity market, which is ignored in most studies and textbooks, is
quantitatively the most important channel for monetary policy in the short run. The wealth effect from a
monetary surprise in the equity market dwarfs the wealth effect in debt markets.

JEL codes: E44, G12
Keywords: Monetary policy, yield curve, stock market, factor model

Contact information: Craine, Economics 3880, University of California, Berkeley, CA USA 94720, email:
craine@econ.berkeley.edu. Martin, Economics, University of Melbourne, Victoria Australia 3010, email:
vance@myriad.its.unimelb.edu.au.
We thank John Cochrane, Ken Kuttner, Roberto Rigobon, and seminar participants at Berkeley and
Melbourne for valuable comments.
1
Introduction

Economists have attempted to quantify the effect of monetary policy for a long time without much success.
The task is to estimate the change in a policy target caused by the change in policy. It turns out that this is
very hard to do. At least three basic econometric problems plague the effort. First, the policy instrument
in recent years the Fed Funds Target Rateis endogenous. Second, economic variables respond to
anticipated as well as realized changes in monetary policy. And third, economic variables respond to
influences other than monetary policy changes. Figure 2.1 shows the yields on 10 year and 1 year Treasury
bonds and the Fed Funds Target Rate (from now on denoted as the Target). They move together, but with
no clear lead-lag relationship. Market rates respond to changes in the Target and other variables and
policymakers use information in long maturity yields as an indicator of inflationary expectations. Figure
2.2 shows the Target and the 30-day Eurodollar rate for 1999-2001. The Eurodollar rate frequently
anticipates Target changes, but other factors clearly influence the rate. Y2K fears abruptly increased the
Euro rate by % in December of 1999. The increase evaporated in January when the new millennium
arrived without the widely predicted and feared computer glitches.

This paper is part of a growing recent literature that tries to filter exogenous monetary policy surprises from
daily data. The literature uses the fact that monetary policy surprises are only realized on days that the
Federal Reserve changes the Federal Funds Target, or on days that the Federal Open Market Committee
(FOMC) meets and the market expects a change that does not happenso-called event days. On event
days security prices respond to FOMC decisions, but FOMC decisions do not depend on the current days
realizations of security prices. Daily data solve the policy endogeneity problem. Problems two and three
remain. Policy changes must be decomposed into anticipated and unanticipated components and effects of
policy and other influences sorted out. We extend the existing literature in three directions: (1) theory: we
specify a general factor model in which security prices respond to multiple sources of systematic risk
monetary policy surprises and other market wide information shocksand idiosyncratic risk. (2)
Empirical: we use all of the daily data while other studies use a small sub-sample of less than 10% of the
data. And (3) econometric: we estimate a vector model and impose the over-identifying restrictions. These
are the first estimates of an over-identified vector model for monetary surprises that we know of.
2

Most of the literature relies on the event study specification. Event study models define the monetary policy
surprise as the change in a specific observable short maturity interest rate on the event day. The notion is
that the short rate reflects the anticipated Target rate, so changes in the short rate reveal the monetary policy
surprise. Cochrane and Piazzesi (2002) chose the change in the 30-day in the Eurodollar rate (see Figure
2.2 for visual support), and Bernanke and Kuttner (2003), Kuttner (2001), and Poole and Rasche (2000)
chose the change in the Federal Funds Futures market rate. The event studies specification implicitly
assumes that problem three, shocks other than monetary surprises, either dont occur on event days or that
they dont affect short maturity rates on event days. If the identification assumption is correct, then
regressing the change in a longer maturity yield or the equity return on the change in the short maturity
yield on event days gives a consistent estimate of the response to a monetary shock.

If, however, the assumption is wrong and other information shocks as well as the monetary policy surprise
affect short maturity rates, then the monetary policy surprise revealed by the change in the short rate is
measured with error. Table 2.1 shows that the standard deviation of the change in the Eurodollar rate is
50% larger on event days than nonevent days. Our factor model attributes roughly 60 to 70%, but not
100%, of the variance in the short rate to monetary shocks on event days. Figure 2.2 shows that other
factors, such as Y2K fears, led to large changes in the short rate.

Poole, Rasche and Thornton (2002) were the first to recognize explicitly that the change in a short maturity
interest rate on the event day measures the monetary policy shock with error. They used an errors in
variables model to estimate the response of yields to the monetary policy surprise on event days. Our factor
model generalizes their errors in variables specification and uses all the daily data.

Event study models can use only the data from event days. And event days are less than 5% of the trading
days since 1988. Rigobon and Sack (2002), in a paper that breaks the mold, specify a model that can use all
the data and includes a common information shock. They specify a bivariate simultaneous equation model
for the change in the short rate and a security price. In their specification the monetary policy shock enters
3
through the change in a short yield (as in the event study models) and a common information shock (a very
important generalization) affects both securities. Their model is under-identified. They use the fact that the
monetary policy shock occurs only on event days to identify and estimate the security price response to a
monetary shock. They cannot recover any of the other model parameters. They use a paired sample of event
and nonevent daysonly about 10% of the data. Their identification of the structural parameter rests on the
bivariate specification. In a multivariate specification their procedure only reveals the vector of reduced-
form coefficients, or factor loadings, on the monetary policy shock.

We adopt the popular factor model specification from financial economics, e.g., see Bodie, Kane, and
Marcus, (2002), Chapter 10, or Cochrane (2001), Chapter 6. Security prices (yields and equity returns)
depend on systematic (nondiversifiable) sources of risk and idiosyncratic (diversifiable) sources of risk.
Monetary policy and other information shocks are the factors. We follow Rigobon and Sack and use the
fact the monetary shocks occur only on event days to identify the monetary surprise factor. Our model is
over-identified. We estimate the factor loadings on the monetary policy shocks and the common shocks.
We impose the over-identifying restrictions and use all of the daily data.

Our empirical results show that efficiently estimating a more general model leads to economically
important differences. We solve a long standing puzzle and highlight an important largely neglected short-
run channel of monetary policy. Cochrane and Piazzesi, the latest of many, find that long maturity yields
respond significantly to monetary policy surprises. They properly label this result as a puzzle. Romer and
Romer (2000) conjecture a surprise in the Feds policy action conveys new information to market
participants that causes them to revise their inflationary expectations. The factor model gives a simpler
solution to this puzzle. Our estimated yield curve response to monetary policy shocks fits the classic
textbook description. A Target surprise has a slope effect on yieldsshort maturity yields increase more
than intermediate maturity yields and the long maturity (10 year) yield does nothing in response to a
surprise. Common information shocks have a level effect on yields. Specifications that omit the common
shock find that monetary policy surprises affect the level of the yield curve. We also find that the equity
market, which is not considered as a short run channel of monetary policy in most textbooks or empirical
4
studies, is the dominant channel of monetary policy. The equity market is four times as large as the debt
market and the response to a monetary surprise in equity markets is twice the response in debt markets. The
wealth effect in equity markets from a monetary surprise dominates the wealth effect in equity markets.
Bernanke and Kuttner, Guo (2003), and Rigobon and Sack also find large equity market responses to
monetary policy surprises. Bernanke and Kuttner present evidence that monetary surprises affect the equity
risk premium.

The paper is organized as follows: Section 1 presents the details of our factor model specification and
compares it with the other specifications. Section 2 shows the data. Section 3 presents estimates of the
bivariate and multivariate versions of the factor model and compares the results with our estimates of the
event study specification and Rigobon and Sacks specification.


Section 1: Models of Monetary Shocks

A Factor Model

We use a factor model of demeaned yields
1
, i and y, and the demeaned equity return, r. We distinguish the
shortest maturity yield, i, only because it makes it easier to compare the factor model to the event study and
Rigobon and Sacks model.

We assume that yields and the equity return respond to systematic sources of riskthe monetary policy
surprise, m, a market wide information shock
2
, s,--plus a security specific idiosyncratic shock, e,

t i t i t
t y t y t y
t r t r t r et
i m s
y m s
r m s e
yt
e



= +
= + +
= + +
(1.1)
The shocks are independently and identically distributed with zero means and unit variances. The shortest
maturity yield, i, has no idiosyncratic shock
3
.

1
Here to keep the notation simple we treat the yield vector, y, as a scalar. Generalization to a vector is
straightforward.
2
In this section we treat s as a scalar to simplify the notation. We allow for multiple sources of systematic
risk, in addition to the monetary shock, below.
5

Factor models are common in financial economics. Ross (1976) arbitrage pricing model starts with a
statistical characterization of returns as a factor structure as we do here. Factor models also can be derived
from structural economic models. The CAPM is a single factor model in which the market return is the
factor; Mertons (1973) Intertemporal CAPM generates a multiple factor structure.

Identification
We identify the monetary policy shock by formalizing the notion that monetary policy shocks occur only
on event days. Event days are FOMC meeting days, or on days between FOMC meetings when the Fed
changes the Federal Funds Target rate. The covariance matrix of yields and equity returns on event days
reflects the monetary policy shock and the other shocks,
(1.2)
| |
2 2
2 2 2
2 2 2
,
E Event
t
t
i i
y i y i y y y
r i r i r y r y r r r
i
E y i y r t T
r



| | (
|
(

|
(
|
(

\ .
( +
(
= + + +
(
(
+ + +

+
(
and on nonevent days when there is no policy shock the covariance matrix is,

(1.3)
2
2 2
Nonevent
2 2
t T
i
NE y i y y
r i r y r r

(
(
= +

(
+
(

The restriction that monetary policy shocks occur only on event days identifies the monetary shock. The
model is over-identified. In equation 1.2 and 1.3 there are eight unknown parameters,
{ , , , , , , , }
i y r i y r y r
=

3
The restriction makes our specification comparable to the event study and R&Ss specification. The
restriction is not rejected, see Section 3 and the Appendix.
6
and twelve unique elements of the covariance matrices. The extension to a yield vector with n maturities is
straight-forward and increases the over-identifying restrictions
4
.

Estimation
Generalized Method of Moments (GMM) is the natural way to estimate this model. We estimate the sample
moments with the observable data. And we use GMM to estimate the unknown parameters and test
hypotheses.

Using the notation in Hamilton (1994) Chapter 14 let g() denote the vector of the deviation of the sample
moments from the population moments (that are functions of the unknown parameter values). For example,
the first two elements of g are,

2 2 2
1
2
1
( ( ))
1
( (
Event
Evemt
Event t i i
t T Event
Event t t y i y i
t T Event
g i
T
g y i
T

))

= +
= +

(1.4)
We get consistent estimates of the unknown parameter vector from,

0
arg max ' Q g W g

= (1.5)
where W
0
is any positive definite matrix.

And we get asymptotically efficient estimates using an optimal weighting matrix, see Hamilton.

Comparison with the Literature
Event Study Models
Event study models look only at event days (or windows around the event day) when the Fed changes the
Fed Funds target, and/or when the FOMC meets, t T
Event
. Since the FOMC meets only eight times a year
and target changes between meetings are unusual in recent years the event study methodology uses only a
small subset of the daily data. For example, between 1988 and the end of 2001 there are over 3000 trading

4
Increasing the number of factors increases the parameters and reduces the number of over-identifying
7
days on the NYSE (observations on yields and returns), but only 144 event days (FOMC meeting dates and
target change dates.)

Identification and Estimation
Event study models define the observed change in the short maturity interest rate on event days as the
exogenous monetary shock. Cochrane and Piazessi use the change in the one-month Eurodollar rate.
Bernanke and Kuttner, Kuttner, and Poole and Rasche use the change in the Fed Funds Futures rate
5
. The
exogenous monetary shock, defined as the change in the short rate, affects longer maturity yields and
returns,

2 2
; 0;
; 0;
; 0;
;
t t i t
t t Event
t y t y t y yt
y t y yt t Event
t r t r t r rt
r t r rt t Event
t m Event
i m s
m s t
y m s e
i e s t T
r m s e
i e s t T
E i t T
T

= +
= =
= + +
= + =
= + +
= + =
=

(1.6)
Regressing the change in the yield, or return, on the change in the short rate on event days gives the
response to a monetary surprise.

Comparison
Event study models identify the monetary shock by assuming that the common shocks, s, are zero on event
days. We assume that the variance of the common shock is the same on event and nonevent days and use
the fact that the realization of the monetary shock is zero on nonevent days to identify the monetary shock.

Errors in Variables Model
Poole, Rasche, and Thornton (2002) is the only event study model that explicitly recognizes that changes
in the short maturity interest rate may reflect information surprises as well as the monetary policy surprises.

restrictions.
8
They add an information shock to the short maturity interest equation (but not to the longer maturity
yields.) In their specification the observed response, i, is a contaminated measure of the monetary shock,

( )
t t i t
t y t y yt
y t y yt y i t
Event
i m s
y m e
i e s
t T
;

= +
= +
= +

(1.7)
which by construction is correlated with the equation error in their yield equation. They use Wall Street
Journal articles to identify event days with no monetary surprise. On these days the variance of i is the
variance of the information shock. Given the estimate of
i
, they use an errors in variables estimator which
gives consistent estimates of the yield response coefficients,
y
, for their specification.

Comparison
Our factor model generalizes Poole, Rasche, and Thorntons errors in variables model. Our model gives
consistent estimates when the information shock affects all the security equations and it filters the monetary
policy surprise from all the yields, not just the short rate. In addition, we use a different, and arguably more
objective, identification scheme that allows us to use all the datanot just event days.

Rigobon and Sacks Model
Rigobon and Sack specify a bivariate simultaneous equation model with an unobservable common shock, s

(1.8)
t iy t i t t
t yi t t y
t
i b y c s m e
y b i s e
= + + +
= + +
it

The monetary policy shock enters via the short rate (as in event study models) and spreads to the other
yield through the simultaneous equation specification.

The reduced form of Rigobon and Sacks model is observationally equivalent to a factor model with four
factors and no idiosyncratic shocks,

5
The Fed Funds Futures contract is an unusual contract that depends on the average of the daily Fed Funds
9

(1.9)
i i i i
t t it
y y y y
t
i
m s e
y


( ( ( ( (
= + + +
( ( ( ( (

yt
e
E

R&S Identification & Estimation
The model is under-identified.
6
R&S cleverly use the fact that the monetary policy shock occurs only on
event days to partially identify the model.
7
They call this identification thorough heteroskedasticity. The
difference between the reduced form covariance matrices,
(1.10)
2
2
RS RS RS
E N
i
y i y

(
= (
(

reveals the reduced-form parameters, or factor loadings, on the monetary policy shock.
8


R&S use a special feature of a bivariate system that ratios of the elements of the inverse matrix reveal the
structural parameters,

1
1
1
1
1
iy
yi
iy yi
b
B
b
b b

(
=
(

(1.11)
to identify the coefficient on the short rate,

2 2
/ /
yi y i i y y i y i
b / = = = (1.12)
in the yield equation.

R&S estimate the identified parameter using an instrumental variable procedure. The advantage of the IV
procedure is that it allows one to estimate the parameters with a canned regression package. The
disadvantage is that it does not impose the over-identifying restriction in equation (1.10).

rates, see Kuttner, and Poole et al, for details.
6
Rigobon (2002) Section 3 gives the general conditions for identification of this type of model.
7
Actually they assume that monetary policy shocks are larger on event days. The specification in equation
(1.8) is equivalent to specifying larger monetary shocks on event days.
10
They do not use all the data in their regressions. They chose a paired sampleone nonevent day for each
event day. They use about 10% of the available data. For nonevent days they chose the day before the event
day. Choosing a different nonevent day, e.g., ten days before, can lead to very different point estimates.

Comparison
The reduced form of R&Ss simultaneous model specification is observationally equivalent to a factor
model in which the simultaneous equation structural errors are factors (systematic risk.) In a bivariate setup
one can interpret the ratio of the factor loading on the yield to the factor loading on the short rate as the
structural coefficient on the short rate in the simultaneous equation model. In a multivariate framework all
one can recover is the reduced-form coefficient, or factor loading, vector on the monetary shock, see
Rigobon (2000), proposition 2. Our factor model specification is identified and gives the factor loadings on
the monetary policy shock and the loadings on the common information shocks in a general multivariate
setup.

Section 2: Data

Data Sources

We use data on US bond yields and US equity returns for the period from 10/88 (when Fed Funds Futures
began trading on the CBOE) through 12/01 (the latest CRSP data when we started estimation.) We also
look at a sub-sample starting in 1/94 when the FOMC began to pursue a more transparent policy regime
that made it easier for market participants to forecast policy (Target) changes. The Fed announced changes
in the Target immediately and in 1997 announced the intended federal funds rate and in 1999 started
announcing an intended bias toward changing the Target or keeping it the same. Arguably the most
important move to transparency was limiting Target changes to FOMC meeting dates except for very
unusual events. Prior to 1994 most of the Target changes took place between meetings. Agents had to guess
when the Target would change as well as by how much.


8
Notice that the difference in the sample covariance matrices for a bivariate factor model will yield
estimates of the factor loadings,
i
,
y
, that are identical to the reduced form estimates of R&Ss model.
11
We use the publicly available data that most of the event study papers use. The yield and Euro$ data come
from the Federal Reserve Boards web site www.federalreserve.gov/releases/. We chose yields for constant
maturity treasury bonds with maturities of 10years, 5years, 3years, 1year, and 3months and the 30-day
Euro$ rate. Figure 2.1 shows the Fed Funds Target and the one and 10year yields. The yields and Target
are measured at annual percentage rates.


Figure 2.1: Yields and Fed Funds Target


1988 1990 1992 1994 1996 1998 2000 2002
1
2
3
4
5
6
7
8
9
10
tcm10y tcm1y FFTarget
tcm10y
FFTarget
tcm1y

The yields and the Target move together, but there are significant departures, even in the one-year yield.
More importantly, there is no clear lead-lag relationship to establish causality.

Event study models define the monetary policy shock on the event day as a change in a short rate. The
choice of a short rate is especially important in these models. Cochrane and Piazzesi equate the change in
12
the 30-day Eurodollar rate
9
on event days with the monetary policy surprise. Figure 2.2 shows the Euro rate
and the Fed Target.

Figure 2.2: Euro$ rate and FED Funds Target rate


1999 2000 2001 2002
1
2
3
4
5
6
7
Euro1m and Target
Target
Euro


The Euro anticipates most of the increases the Target during 1999 and the first half of 2000, and then most
of the decreases in 2001. Cochrane and Piazzesi use this impressive visual evidence to justify identifying
the monetary policy surprise as the change in the 30-day Euro rate. One should also notice considerable
movements in the Euro rate that are unrelated to the Fed Funds Target. The largest (in the picture) occurred
in December of 1999 when Y2K fears added % to the Eurodollar rate
10
. The premium disappeared when
the New Millennium arrived without the feared and predicted computer systems failures.


9
Cochrane and Piazzesi use an event window.

13
Fed Funds Futures
The Fed Funds futures data comes from Datastream. We used Kuttners (2001) formula to calculate the
change in the futures rate.

Equities
Financial journalists frequently attribute changes in stock prices to changes in Federal Reserve policy, or to
no changes in policy when the market expected a change. It turns out the journalists are right. We find the
largest responses to monetary shocks occur in the equity market. The recent papers by Bernanke and
Kuttner, Hui Guo, and Rigobon and Sack also find large equity market responses to monetary surprises.

We use the return on the value-weighted NYSE from CRSP. The return is calculated as the log difference
of the value-weighted index including distributions. The return is a daily return expressed as a percentage.

Event Days
The FRB website lists meeting days and target changes after 1994. We used Kuttners (2001, 2003) dates
for the early period and a few later dates where the actual announcement time was unclear.

Descriptive Statistics
Table 2.1 gives descriptive statistics for the full sample period. We use every trading day between October
1988 and the end of 2001 when trades occurred on both the NYSE and the Bond market. The only
exception is that we excluded September 17, 2001
11
. On September 17 the NYSE reopened after being
closed for a week following the 9/11 attacks and Fed reduced the target rate. Table 2.2 gives the descriptive
statistics for the sub-sample from 1994-2001.






10
We led the Eurodollar rate by one day to compensate for the six-hour time differential between New
York and London. In Figure 2.2 leading the Euro makes it appear as if the market also anticipated the New
Year.
11
Bernanke and Kuttner also exclude the 9/17/2001 observation.
14
Table 2.1
Descriptive statistics for changes in yields and equity returns. The yields are measured
at annual rates in basis points and the equity return is the daily
percentage
Sample: daily 10/1988 through 12/2001.

Asset Std dev Cov-30 day Euro Cov- 1 mth Futures


Event Non-Event Event Non-Event Event Non-Event
30 day Euro
FF Futures
10.561
9.933
7.203
6.499
- - - -
3 mth yield
1 yr yield
3 yr yield
5 yr yield
7 yr yield
10 yr yield
7.718
7.707
7.200
7.216
6.747
6.306
5.392
5.546
6.328
6.313
6.148
5.864
57.988
55.749
38.774
32.294
24.974
18.756
7.723
10.388
11.458
10.150
9.375
8.312
50.809
49.917
32.134
24.507
19.267
13.499
7.366
8.491
7.302
6.640
5.577
4.963
Equity return 0.857 0.852 -3.727 -0.217 -2.765 0.017
No. of days 144 3161 _ _ _ _

15
Table 2.2
Descriptive statistics for changes in yields and equity returns. The yields are measured
at annual rates in basis points and the equity return is the daily
percentage
Sample: daily 1/1994 through 12/2001.



Std dev Cov - 30 day Euro Cov - 1 mth Futures Asset
Event Non-Event Event Non-Event Event Non-Event
30 day Euro FF
Futures
11.008
9.547
5.146
4.528
- - - -
3 mth yield
1 yr yield
3 yr yield
5 yr yield
10 yr yield
7.018
6.440
7.040
7.444
6.417
5.664
5.383
6.359
6.418
6.077
47.129
40.989
25.258
18.043
1.597
7.280
7.700
7.904
6.827
4.815
35.558
27.761
12.109
4.722
-7.546
7.378
6.820
6.228
5.571
3.794
Equity return 0.978
0.927
-6.408 -0.001 -5.119 0.282
No. of days 68 1926


The first two columns give the standard deviations of the variables on event and nonevent days. The event
daysFOMC meeting days or Target change dayshave larger standard deviations. More news arrives
on event days. The first two rows show the standard deviation of the change in the shortest maturity interest
ratethe 30-day Eurodollar, and the Fed Funds Futures rate. Event studies define the change in the short
maturity rate on event days as the monetary shock. The standard deviation of these variables is 50% larger
on event days. But if the variance of the information shock is constant, then 2/3 of the standard deviation of
the short rate comes from other information shocks on event days. Information arrives every day that
changes yields. Sorting information shocks from monetary policy shocks is important.
16
The remaining columns give the covariance between changes in a short maturity yield and changes in
longer maturity yields and the equity return.
12
The covariance is much larger on event days than on
nonevent days.

3.1 Bivariate Models
In this subsection we present estimates of the bivariate version of the factor model. The next subsection
compares the responses to a monetary shock from the bivariate factor model with our estimates of the
responses from the event study and R&Ss specification.

Table 3.1.1.a shows estimates of the factor model for the long sample of daily data starting in 10/88 and
ending in 12/01 using the Eurodollar rate as the short rate i. Table A.1.b in the appendix shows the
estimates for the sample beginning in 1/94 when Fed policy became more transparent. And Tables A.1.c
and A.1.d in the Appendix show the estimates for the bivariate factor model with the Fed Funds Futures
rate as the short maturity rate for the two sample periods.

The two important results to notice in Table 3.1.a and Tables A.1 in the Appendix are (1) The common
information shock (column 1) is significant in all of the yield equations for both samples. And (2) the
equity response to a monetary shock is large and significant.

The bivariate specification is.

; x (y,r)
t i t i t
t x t x t x t
i m s
x m s e


= +
= + +
(1.13)




12
These are proportional to the response coefficients in event studies.
17
Table 3.1.1.a
Bivariate Factor Model
i= Eurodollar Rate
Sample 10/88-12/01
GMM standard errors below the coefficients
Common Money Idiosyn. Test
shock () shock () SD (
e
) (pv)
i 6.659 8.740 1.589
(0.656) (1.356) 0.207
3mth 1.159 5.878 5.213
(0.301) (0.816) (0.211)

Common Money Idiosyn. Test
shock () shock () SD (
e
) (pv)
i 6.892 8.486 0.531
(0.633) (1.223) 0.466
1 yr 1.500 5.518 5.326
(0.248) (0.963) (0.132)

Common Money Idiosyn. Test
shock () shock () SD (
e
) (pv)
i 7.181 7.792 0.016
(0.719) (1.496) 0.900
3 yr 1.593 3.442 6.121
(0.216) (1.048) (0.121)

Common Money Idiosyn. Test
shock () shock () SD (
e
) (pv)
i 7.243 7.332 0.128
(0.721) (1.596) 0.720
5 yr 1.402 3.219 6.159
(0.188) (1.067) (0.115)

Common Money Idiosyn. Test
shock () shock () SD (
e
) (pv)
i 7.126 7.358 0.166
(0.733) (1.689) 0.684
10 yr 1.153 1.694 5.755
(0.126) (1.060) (0.106)

Common Money Idiosyn. Test
shock () shock () SD (
e
) (pv)
i 6.780 8.462 3.526
(0.745) (1.572) 0.060
Equity -4.600 -41.700 83.600
(2.500) (12.000) (2.000)

18
The last column gives the test of the over-identifying restriction (one for the bivariate model) with the
probability value below the test statistic. Of the twenty-four models only the equity model for the 94
sample, Table A.1.d, rejects the test at the 5% level.

Yield and Equity Responses to a Monetary Shock in Bivariate Models
This subsection compares the yield responses to a monetary shock across modelsthe bivariate factor
model, our estimates of the event study, and Rigobon and Sacks model
13
and sample periods. Event
study models, and R&S, specify that the monetary shock enters through the short maturity rate and then the
short maturity rate affects other yields and returns, see equation (1.6) and (1.9). In those models a 1%
monetary policy surprise results in a 1% change in the short maturity rate. In the factor model the monetary
shock directly affects all yields and the equity return. Here we normalize the coefficients (factor loadings)
and their standard errors in the factor model so that a 1% monetary policy surprise causes a 1% change in
the short rate.

The important results to notice here are (1) the normalized factor loadings on the monetary shock (columns
1 and 4) and R&Ss structural coefficients measuring the yield response to a monetary shock (columns 3
and 6) are very similar. The factor model and R&Ss specification allow for a common shock. The
responses in the event study specification, which does not include a common shock, are smaller as a simple
errors in variables model predicts.

13
We used the simple instrumental variable procedure in Section 4.1 of R&S.
19
Table 3.1.2a
Normalized Yield and Equity Response to a 1% Monetary Surprise
Sample 10/1988 - 12/01
Standard errors below coefficient estimates

ASSET 30 day Euro 1mth futures

Factor Event Rig-Sack Factor Event Rig-Sack

3 mth 0.673 0.520 0.778 0.717 0.515 0.639
(0.093) (0.043) (0.095) (0.114) (0.049) (0.078)

1 yr 0.650 0.500 0.674 0.697 0.506 0.554
(0.113) (0.045) (0.084) (0.130) (0.049) (0.069)

3 yrs 0.442 0.348 0.436 0.450 0.326 0.336
(0.134) (0.049) (0.081) (0.137) (0.054) (0.072)

5 yrs 0.439 0.289 0.392 0.422 0.248 0.277
(0.145) (0.052) (0.085) (0.156) (0.057) (0.075)

10 yrs 0.230 0.168 0.223 0.207 0.137 0.113
(0.144) (0.048) (0.078) (0.135) (0.052) (0.069)

Equity -4.923 -3.342 -4.756 -4.298 -2.802 -4.080
(1.422) (0.620) (1.157) (1.564) (0.684) (1.045)



(2) The choice of the short maturity yield30 day Eurodollar or Fed Funds Futuresdoesnt make much
difference. And (3), the standard errors of the factor estimates are larger than the other models. Using all of
the data and imposing the restrictions matters.
20
Figure 3.1.2a illustrates the yield responses and the 95% confidence interval with the Euro as the short
ratethe first three columns of Table 3.1.2.a. For maturities longer than one-year the confidence band for
the factor model (in red) contains the confidence bands for the event (in green) and R&Ss specification (in
black).


Figure 3.1.2.a

Sample 88-01



0 2 4 6 8 10 12
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
Maturity
Yield Response to 1% Mshock with 95% Confidence Bands
Factor
R&S
Event



The point estimates show the same pattern for the three models, with the event study responses smaller than
the factor and R&S models. The factor model has the largest confidence band. The R&S specification has
the intermediate confidence band. And the event study specification has the tightest confidence band. The
response of the 10-year yield to a shock is insignificant in the factor model and significant in the event
study specification and R&S specification (which allows for another shock but uses a small paired sample).

21

Table 3.1.2b gives the estimated responses for the shorter sample starting in 1994.


Table 3.1.2.b
Normalized Yield and Equity Response to a 1% Monetary Surprise
Sample 1/1994 - 12/01
Standard errors below coefficient estimates


ASSET
30 day
Euro

1mth futures



Factor Event Rig-Sack

Factor Event Rig-Sack



3 mth 0.421 0.390 0.372 0.453 0.390 0.417
(0.110) (0.062) (0.076) (0.144) (0.077) (0.091)



1 yr 0.352 0.338 0.304 0.318 0.304 0.265
(0.114) (0.059) (0.062) (0.155) (0.074) (0.076)



3 yrs 0.200 0.208 0.166 0.077 0.133 0.084
(0.172) (0.074) (0.075) (0.186) (0.089) (0.088)



5 yrs 0.256 0.149 0.112 0.035 0.052 0.007
(0.201) (0.081) (0.080) (0.244) (0.096) (0.093)



10 yrs -0.018 0.013 -0.030 -0.160 -0.083 -0.137
(0.186) (0.072) (0.075) (0.205) (0.082) (0.085)



Equity -6.915 -5.287 -5.920 -6.898 -5.616 -6.420
(1.220) (0.878) (1.022) (1.967) (1.054) (1.187)



The shorter sample in which Fed policy was more transparent shows far fewer significant responses to
monetary surprises for any of the models and the point estimates show no particular pattern. Note that the
factor model estimates have larger standard errors than the other models.

Response of Equity Returns to a Monetary Policy Surprise
An important, and robust, empirical result is that the equity market response to a monetary surprise
dominates the response in debt markets. Equities show a large, and statistically significant, response to
monetary surprises in all of the models for both sample periods. In Tables 3.1.2 the responses for bonds and
equities are not easy to compare. The yield responses are measured at annual percentage rates and equity
22
responses in percent daily (logarithmic) returns. Table 3.1.3.a below shows the responses to a monetary
shock where all of the responses are measured as percent daily (logarithmic) returns.
14




Table 3.1.3.a
Bond and Equity Response to a 1% Monetary Surprise
Measured as % daily returns
Sample 10/1988 - 12/01
standard errors below coefficient estimates


ASSET
30 day
Euro 1mth futures

Factor Event Rig-Sack Factor Event Rig-Sack

3 mth -0.168 -0.130 -0.194 -0.179 -0.129 -0.160
(0.023) (0.011) (0.024) (0.028) (0.012) (0.019)

1 yr -0.650 -0.500 -0.674 -0.697 -0.506 -0.554
(0.113) (0.045) (0.084) (0.130) (0.049) (0.069)

3 yrs -1.326 -1.044 -1.308 -1.350 -0.978 -1.008
(0.402) (0.147) (0.243) (0.411) (0.162) (0.216)

5 yrs -2.195 -1.445 -1.960 -2.110 -1.240 -1.385
(0.725) (0.260) (0.425) (0.780) (0.285) (0.375)

10 yrs -2.300 -1.680 -2.230 -2.070 -1.370 -1.130
(1.440) (0.480) (0.780) (1.350) (0.520) (0.690)

Equity -4.923 -3.342 -4.756 -4.300 -2.802 -4.080
(1.422) (0.620) (1.157) (1.564) (0.684) (1.045)

A positive monetary policy shock causes all security pricesbonds and stockto decline. But the change
in the daily return for equity is more than twice the change in the return on any bond. And this result is not
sensitive to the sample period, or the model specification, see Tables 3.1.2.


t
14
The annual yield on a discount bond with maturity n (n years) is ( ) ln( ( ) ) /
t
y n B n n = , where B is
the bond price. So the daily return is r n ( ) ( )
t
n y n
t
where we ignored the one day change in the
maturity.



23
Figure 3.1.3.a shows the response of bond and stock returns and the 95% confidence interval to a 1%
monetary policy shock for the factor, event study, and R&S specification with the 30-day Euro as the short
rate.

Figure 3.1.3.a
Sample 88-01


0 2 4 6 8 10 12 14 16
-8
-7
-6
-5
-4
-3
-2
-1
0
1
Maturity
%returns
Return Responses to 1% Mshock with 95% Confidence Bands
Event
R&S
Factor
Equity


The response to a monetary policy shock measured in the daily return grows with the maturity of the bond
(long maturity bond prices are more volatile). Changes in the return on one-year bonds are less than 1% and
on 10-year bonds are only 2%. Changes in the equity returnshown as a maturity of 15 years in the
figureare ten times as large as the change in the one-year bond return and twice as large as the change in
the five and ten year bond returns.

The wealth effect in the equity market from a monetary surprise dwarfs the wealth effect in debt markets.
The change in wealth due to a monetary shock is the sum of the products of the change in the assets return
24
times the capitalized value of the asset
15
. Market capitalization of equity was roughly $12 trillion at the end
of 2002 while US Treasury securities were only $3.6 trillion. Corporate and mortgage debt push the debt
capitalization close to the equity market, but since most of the reaction in the bond market to a monetary
surprise is at the short end of the maturity structure, no matter how one measures it, the wealth effect in the
debt market is small relative to the equity market.

Our results indicate that the equity market is quantitatively the most important channel of monetary policy
in the short run. Bernanke and Kuttner, Guo, and Rigobon and Sack also find large, significant, response
coefficients of equity returns to monetary surprises.


3.2 Multivariate Factor Models

In theory the monetary shocks and common shocks affect all assets. Estimating a vector model of assets
returns that imposes the over-identifying restrictions gives more efficient estimates. This section extends
the model to a vector of five yields and the equity return. The short rate plays no special role in the factor
model. It is just another yield. We include both the 30-day Euro rate and the change in the Fed Funds
futures in the yield vector. We find four sources of systematic riskthe monetary policy shock, and three
common shocks. There are 19 over-identifying restrictions.

15

i
i
i
r
dW Adm
m

where W denotes wealth and A the capitalized value of the asset.

25
Table 3.2.1a shows the estimates for the long sample from 10/88 through 12/01 and 3.4.1b shows the
estimates for the shorter sample starting in 1/94.

Table 3.2.1a
Multivariate Factor model
10/1988-12/2001
standard errors based on GMM in parentheses


Asset Money Com. 1 Com. 2 Com. 3 Idiosyn.
Euro 9.403 2.201 4.625
(1.080) (0.352) (0.372)

FF Fut. 8.163 1.526 1.317 4.843
(0.869) (0.242) (0.427) (0.627)

3 mth 5.177 3.721 0.115 3.724
(0.700) (0.304) (0.234) (0.153)

3 yrs 3.004 4.740 -3.526 2.190
(0.875) (0.265) (0.378) (0.072)

10 yrs 1.167 3.371 -4.778
(0.860) (0.416) (0.295)

Equity -30.800 5.600 24.100 -9.700 79.2
(9.700) (4.500) (2.100) (2.100) (1.900)

Test 20.859
No. 19
(pv) (0.345)




26


Table 3.2.1b
Multivariate Factor model
1/1994-12/2001
standard errors based on GMM in parentheses


Asset Money Com. 1 Com. 2 Com. 3 Idiosyn.
Euro 11.850 1.871 3.604
(1.321) (0.505) (0.464)

FF Fut. 9.758 1.477 0.160 3.696
(0.982) (0.339) (0.205) (0.297)

3 mth 4.211 3.521 -0.541 3.917
(0.642) (0.388) (0.227) (0.205)

3 yrs 0.740 3.662 -4.630 2.140
(1.015) (0.304) (0.281) (0.079)

10 yrs -1.497 2.303 -5.583
(1.144) (0.462) (0.219)

Equity -63.000 13.400 19.700 -8.200 85.000
(7.800) (5.200) (2.600) (2.700) (2.600)


Test 23.393
No. 19
(pv) (0.220)



In the factor model the coefficients measure the response to a one standard deviation shock in the factor.
Column 1 shows the response of yields or the return to a monetary shock. We examine these in detail
below and normalize the responses to make them comparable to the event and R&Ss model. Here we
concentrate on the common information shocks. The first common shock is a level shock to the yield
curve. All yields increase significantly with the intermediate maturity yields increasing slightly more. The
level common shock has an insignificant effect on the equity return in the long sample, but has a positive
effect on the equity return in the 94 sample. The second common shock twists the yield curve. Long
maturity yields fall (bond prices rise) more than shorter maturity yields and the stock price increases. The
third common shock affects only very short yields and equity. The effect of the third common shock is
similar to the monetary shock, see below. The monetary shock affects short yields and equity.


27
3.2.2 Response to a monetary policy shock

Table 3.2.2a and 3.2.2.b show the responses of yields and the equity return to a monetary shock for the
multivariate model, the bivariate factor model, the event study model, and R&Ss specification.

Table 3.2.2a
Yield and Equity Response to a 1% Monetary Surprise
Response of 30-day Euro normalized to 1
Sample 10/1988-12/01
Standard Errors below coefficient estimates

Multi-Factor Bi-Factor Event Rig-Sack
Asset
Euro
1 1 1 1

(0.114)


FF Fut.
0.868

(0.092)

3 mth
0.550 0.673 0.52 0.778

(0.0744) (0.093) (0.043) (0.095)

1 yr 0.650 0.500 0.674
(0.113) (0.045) (0.084)

3 yrs
0.319 0.442 0.348 0.436

(0.093) (0.134) (0.049) (0.081)

5 yrs 0.439 0.289 0.392
(0.145) (0.052) (0.085)

10 yrs
0.124 0.230 0.168 0.223

(0.091) (0.144) (0.048) (0.078)

Equity
-3.275 -4.923 -3.342 -4.756

(1.031) (1.422) (0.620) (1.157)

28


Table 3.2.2b
Yield and Equity Response to a 1% Monetary Surprise
Response of 30-day Euro normalized to 1
Sample 1/1994-12/2001
Standard Errors below coefficient estimates

Multi-Factor Bi-Factor Event Rig-Sack
Euro
1 1 1 1

(0.111)

FF Fut.
0.823

(0.083)

3 mth
0.355 0.421 0.389 0.372

(0.054) (0.110) (0.062) (0.076)

1 yr 0.352 0.338 0.304
(0.114) (0.059) (0.063)

3 yrs
0.062 0.200 0.208 0.166

(0.086) (0.172) (0.074) (0.07)

5 yrs 0.256 0.149 0.112
(0.201) (0.081) (0.080)

10 yrs
-0.126 -0.018 0.013 -0.030

(0.097) (0.186) (0.072) (0.075)

Equity
-5.318 -6.915 -5.287 -5.920

(0.654) (1.220) (0.878) (1.022)


The event study model and R&S specify that a 1% monetary shock causes a 1% change in the short maturity
rate (here the 30-day Euro.) The first row in Tables 3.2.2 reflects the normalization to match the event and
R&Ss model.

The factor models display the classic textbook slope effect for the yield curve response to a monetary
shock. The short end of the yield curve shifts up (for a positive shock) and nothing happens to the long
maturity yields. The standard errors of the coefficient estimates are usually smaller in the multivariate
model than in the bivariate modelas one would expect. Notice, however, that the standard error of the
29
response for the 10-year yield is larger than the standard error in the event study or R&Ss model, and the
coefficient is insignificant.

Figure 3.2.2 shows the yield curve response to a monetary shock in the multivariate and bivariate factor
models.


Figure 3.2.2
Factor Model Responses to Mshock
Sample 88-01






















The yield curve response in the multivariate model to a monetary shock is very similar to the response in
the bivariate model. The confidence intervals overlap. A monetary shock has a slope effect on the yield
curve. Short maturity yields response positively and significantly to a positive monetary shock and the
response of the long maturity yield is insignificant. The 94 sample shows a similar pattern, but all of the
responses are smaller.


Conclusions

This paper estimates the impact of monetary policy surprises on bond yields and on the equity return. We
solve an old puzzle and we discover a quantitatively important, but largely neglected, channel of monetary
policy.
30

Cochrane and Piazzesis , Cook and Hahns (1998) , and our estimates of the event study specification
show that long maturity bond yields increase significantly in response to a surprise increase in the Target.
Cochrane and Piazzesi label this a puzzle. We also estimated a more general factor model that allows for
information surprises in addition to monetary shocks. The estimates from our factor model provide a simple
resolution to this puzzle: long maturity bond yields dont respond to monetary surprises, they respond to
common information shocks. Specifications that fail to measure the common shock attribute the impact to
the monetary shock.

Equity returns do respond to monetary surprises. The response in equity markets is larger than the response
in debt marketsequity returns move more that debt returns and the wealth effect is larger in the equity
market. This is an important channel of monetary policy where very little empirical or theoretical research
has been done. Our work only documents a large equity return response to monetary surprises. Bernanke
and Kuttner show most of the response is due to a change in the equity premium. Understanding the
response of equity returns to monetary surprises is a fertile area for future research.



References

Ang, Andrew and Monika Piazzesi, 2003, A no-arbitrage vector autoregression of term structure dynamics
with macroeconomic and latent variables, Journal of Monetary Economics, 50, 745-787.

Bernanke, Ben S. and Kenneth N. Kuttner, 2003, What Explains the Stock Markets Reaction to Federal
Reserve Policy? Federal Reserve Bank of New York.

Bodie, Zvi, Alex Kane and Alan J. Marcus, 2002, Investments, McGraw-Hill.

Campbell, John and Luis M. Viceira, 2001, Who Should Buy Long Term Bonds?, American Economic
Review, 91: 99-127.

Campbell, John Y., Andrew W. Lo, and A. Craig MacKinlay, 1997, The Econometrics of Financial
Markets, Princeton University Press.

Caporale, Barbara and Tony Caporale, 2003, Investigating the effects of monetary regime shifts: The case
of the Federal Reserve and the shrinking risk premium, Economic Letters, 80, 87-91.

Cochrane, John H., 2001, Asset Pricing, Princeton University Press.

Cochrane, John H. and Monika Piazzesi, 2002, The Fed and Interest RatesA
31
High Frequency Identification, American Economic Review, 92: 90-101.

Cook, Timothy and Thomas Hahn, 1998, The Effect of Changes in the Federal Funds Rate Target on
Market Interest Rates in the 1970s, Journal of Monetary Economics, 24,331-351.

Faust, Jon, John H Rogers, Eric Swanson and Jonathan H. Wright, 2002, Identifying the Effects of
Monetary Policy Shocks on Exchange Rates Using High Frequency Data, International Finance Discussion
Paper 739, Board of Governors of the Federal Reserve System.

Guo, Hui, 2003, Stock Prices, Firm Size, and changes in the Federal Funds Rate Target, Working Paper
2002-004B, Federal Reserve Bank of St. Louis.

Hamilton, James D. , 1994, Time Series Analysis, Princeton University Press.

Kuttner, Kenneth N., 2001, Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds
Futures Market, Journal of Monetary Economics, 47: 523-544.

Kuttner, Kenneth N., 2003, Dating Changes in the Federal Funds Rate, 1989-92, Working Paper Oberlin
College.

Merton, Robert C, 1973, An Intertemporal Capital Asset Pricing Model, Econometrica 41, 867-887.

Poole, William and Robert H. Rasche, 2000, Perfecting the Markets Knowledge of Monetary Policy,
Journal of Financial Services Research, 18: 255-298.

Poole, William, Rasche, Robert H. and Daniel L Thorton, 2002, Market Anticipations of Monetary Policy
Actions, Federal Reserve Bank of St. Louis Review July/August 65-97.

Rigobon, Roberto, 2002, Identification through Heteroskedasticity, forthcoming Review of Economics and
Statistics.

Rigobon, Roberto, 2000, A simple test for stability of linear models under heteroskedasticity, omitted
variable, and endogenous variable problems, http://web.mit.edu/rigobon/www/.

Rigobon, Roberto and Brian Sack, 2002, Impact of Monetary Policy on Asset Prices, Finance and
Economics Discussion Series 2002-4. Board of Governors of the Federal Reserve System.

Romer, Christina D. and David H. Romer, 2000, Federal Reserve Information and the Behavior of Interest
Rates, American Economic Review, 90, 429-457.

Romer, Christina D. and David H. Romer, 2002, A New Measure of Monetary Shocks: Derivation and
Implications, mimo University of California at Berkeley.

Ross, Stephen A., 1976, The Arbitrage Theory of Capital Asset Pricing, Journal of Economic Theory, 13,
341-360.

Rudebusch, Glenn D, 1995, Federal Reserve Interest Rate Targeting, Rational Expectations, and the Term
Structure, Journal of Monetary Economics, 35, 245-274.






32
Appendix


A.1 Estimates of the bivariate factor model


Table A.1.b
Bivariate Factor Model
i= Eurodollar Rate
Sample 1/94-12/01
GMM standard errors below the coefficients


Common Money Idiosyn. Test
(a)

shock () shock () SD (
e
) (pv)
i 5.145 9.641 <0.001
(0.611) (2.466) (0.997)
3mth 1.414 4.061 5.483
(0.549) (1.058) (0.286)

shock () shock () SD (
e
) (pv)
i 5.151 9.611 0.005
(0.611) (2.441) (0.945)
1 yr 1.498 3.387 5.173
(0.424) (1.100) (0.163)

shock () shock () SD (
e
) (pv)
i 5.160 9.159 0.305
(0.615) (2.443) (0.581)
3 yr 1.551 1.835 6.188
(0.355) (1.572) (0.157)

shock () shock () SD (
e
) (pv)
i 5.157 8.495 0.819
(0.616) (2.461) (0.365)
5 yr 1.331 2.172 6.300
(0.290) (1.712) (0.154)

shock () shock () SD (
e
) (pv)
i 5.146 9.306 0.108
(0.617) (2.341) (0.743)
10 yr 0.938 -0.166 6.011
(0.154) (1.731) (0.143)

shock () shock () SD (
e
) (pv)
i 4.611 10.411 5.986
(0.646) (2.268) (0.014)
Equity -0.049 -0.720 0.895
(0.049) (0.127) (0.026)

33

The last column gives the test of the over-identifying restriction (one for the bivariate model) with the
probability value below the test statistic. Only the equity model for the 94 sample rejects the restriction at
the 5% level.

Bivariate Models with Fed Funds Futures as short maturity rate

Table A.1.c
Sample 10/88-12/01


Common Money Idiosyn. Test
(a)

shock () shock () SD (
e
) (pv)
i 6.367 7.745 0.081
(0.756) (1.377) (0.775)
3mth 1.151 5.556 5.259
(0.254) (0.885) (0.215)

shock () shock () SD (
e
)

i 6.387 7.702 0.049
(0.726) (1.328) (0.824)
1 yr 1.322 5.370 5.381
(0.208) (0.998) (0.141)

shock () shock () SD (
e
)
i 6.515 7.416 0.005
(0.833) (1.597) (0.942)
3 yr 1.121 3.338 6.229
(0.196) (1.016) (0.127)

shock () shock () SD (
e
)
i 6.601 6.941 0.435
(0.841) (1.676) (0.509)
5 yr 1.009 2.931 6.241
(0.164) (1.082) (0.117)

shock () shock () SD (
e
)
i 6.520 7.210 0.237
(0.864) (1.717) (0.626)
10 yr 0.762 1.496 5.822
(0.122) (0.971) (0.108)

shock () shock () SD (
e
)
i 6.215 8.390 1.747
(0.881) (1.400) (0.186)
Equity -0.400 -36.100 84.200
(2.200) (13.100) (2.000)

34
35


Table A.1.d


Common Money Idiosyn. Test
(a)

shock () shock () SD (
e
) (pv)
i 4.561 8.140 0.231
(0.656) (1.932) (0.631)
3mth 1.658 3.692 5.459
(0.454) (1.169) (0.279)

Common Money Idiosyn. Test
(a)

shock () shock () SD (
e
) (pv)
i 4.658 8.070 0.536
(0.657) (1.957) (0.464)
1 yr 1.536 2.566 5.198
(0.359) (1.248) (0.176)

Common Money Idiosyn. Test
(a)

shock () shock () SD (
e
) (pv)
i 4.537 7.983 0.567
(0.663) (1.956) (0.451)
3 yr 1.401 0.612 6.234
(0.296) (1.484) (0.165)

Common Money Idiosyn. Test
(a)

shock () shock () SD (
e
) (pv)
i 4.534 7.569 1.203
(0.664) (1.995) (0.273)
5 yr 1.249 0.262 6.327
(0.241) (1.849) (0.156)

Common Money Idiosyn. Test
(a)

shock () shock () SD (
e
) (pv)
i 4.530 8.161 0.037
(0.664) (1.767) (0.847)
10 yr 0.839 -1.304 6.023
(0.148) (1.672) (0.144)

Common Money Idiosyn. Test
(a)

shock () shock () SD (
e
) (pv)
i 3.984 8.877 4.814
(0.704) (1.791) (0.028)
Equity 0.026 -0.612 0.902
(0.046) (0.174) (0.026)