9th Global Conference on Business & Economics
ISBN : 978-0-9742114-2-7
FIRM SIZE AND INDUSTRY EFFECTS ON MARKET
REACTION TO CHANGES IN THE PRICES OF
FEDERAL FUNDS FUTURES.
Hermann Sintim-Aboagye,
Montclair State University, New Jersey.
Richard Lord
Montclair State University, New Jersey.
ABSTRACT
We investigate the possible effect of firm size and industry on market reaction to changes in the
prices of Federal Funds Futures. Previous studies have examined the effect of monetary policy
changes on long and short term interest rates (Roley & Sellon 1995, Kutner, 2001, Guirguis and
Giannikos 2007) and financial markets ( Madura & Schnusenberg, 2000, Lu and Wu, 2006). We
extend these studies by attempting to capture possible asymmetric effects of broader measures of
firm size and industry on market reaction to open market operations of the Federal Reserve.
We employ Kutner’s methodology using price changes in federal funds futures to capture both
the anticipated and unanticipated components of monetary innovations and then examine how
each of these components relates to the reactions of the financial markets. Kutner’s approach
provides an innovative way to address the generated-regressor problems associated with the
commonly used two-step regression models and provides arguably more reliable results. His
empirical evidence suggests that the unanticipated component of monetary policy action better
explains market reactions.
To capture possible asymmetric market reactions to both expected and unexpected components
of the monetary policy actions, we use the S&P 500, other broad stock indices (small cap, mid
cap etc.) and industry portfolios. Our study covers the period 1996 to 2006.
October 16-17, 2009
Cambridge University, UK
1
9th Global Conference on Business & Economics
ISBN : 978-0-9742114-2-7
REFERENCES
Guirguis, S. Hany & Giannikos, I. Christos, May 2007, ‘A Note of the Effect of Expected Changes in Monetary
Policy on Long-Term Interest Rates.’ Journal of Applied Economics, Vol. 10, No. 1, pp. 99-114.
Kutner, N. Kenneth, 2001, ‘Monetary Policy Surprises and Interest Rates: Evidence from the Fed funds futures
market.’ Journal of Monetary Economics, Vol. 47, pp. 523-544.
Lu, Xinsheng & Wu, Yaomin, summer 2006, ‘Financial Market Reactions to Monetary Policy and Market
Operations: The Australian Case.’ The Business Review, Cambridge, Vol. 5, No. 2, pp. 174-181.
Madura, Jeff & Schnusenberg, Oliver, winter 2000, ‘ Effect of Federal Reserve Policies on Bank Equity Returns.’
Journal of Financial Research, Vol. 23, No. 4, pp. 421-447.
Roley, V. Vance & Sellon, H. Gordon, First Quarter 1995, ‘ Monetary Policy Actions and Long-term Interest
Rates.’ Economic Review-Federal Reserve Bank of Kansas City, Vol. 80, No. 4, pp. 73-90.
October 16-17, 2009
Cambridge University, UK
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