Abstract

This paper examines how unexpected changes in U.S. monetary policy affect equity prices, with particular attention to whether those effects differ across sectors. I focus on three sector groupings—Technology, Real Estate, and Defensive—because they vary systematically in cash-flow duration, leverage, and sensitivity to interest rates, making them useful for studying the channels through which monetary policy is transmitted to stock valuations. The analysis is grounded in a present-value framework in which monetary tightening can affect equity prices both by raising discount rates immediately and by influencing expected cash flows more gradually through broader macroeconomic conditions.

To study these mechanisms, I use two complementary empirical approaches over the 2000–2023 period. First, I estimate a high-frequency event study around scheduled FOMC announcements using 191 event dates and a balanced panel of 573 event-by-sector observations. Event-day abnormal returns are defined as sector returns minus the value-weighted market return, so the event study is designed to isolate the immediate discount-rate channel. Second, I estimate a monthly six-variable VAR using industrial production growth, inflation, a monetary policy shock measure, and monthly sector returns in order to trace the dynamic response of equity returns over time.

The empirical results tell a cautious but internally consistent story. In the event-study analysis, estimated sector responses to monetary policy surprises are statistically weak and not sharply differentiated across sectors. A trimmed-sample robustness check that excludes the ten largest absolute-surprise events leaves this conclusion largely unchanged, although Real Estate appears somewhat more responsive in point estimates. The VAR analysis reaches a similar conclusion: impulse responses are small, concentrated in the short run, and generally statistically imprecise, with Real Estate again showing the largest point estimate but not enough precision to support strong claims of sectoral separation. Across both methods, the evidence suggests that monetary policy does affect sectoral equity returns, but within this empirical design the effects are modest relative to the noise in the data.

Advisor

Tian, Huiting

Department

Economics

Publication Date

2026

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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© Copyright 2026 Pranav Bhaskar