University of Oulu

Ruman, A.M. (2022), "Stock market implications of Fed’s balance sheet size", Journal of Economic Studies, Vol. 49 No. 2, pp. 259-273.

Stock market implications of Fed’s balance sheet size

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Author: Ruman, Asif M.1
Organizations: 1Department of Accounting, Economics and Finance, University of Oulu, Oulu, Finland
Format: article
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 1.4 MB)
Persistent link:
Language: English
Published: Emerald, 2022
Publish Date: 2022-03-07


Purpose: Considering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the unconventional monetary policy, given near-zero interest rates, affects future stock market performance. This paper analyzes the impact of the Fed’s balance sheet size on stock market performance.

Design/methodology/approach: To analyze the Fed’s balance sheet size’s long-term stock market implications, this paper uses the asset pricing framework of market return predictability such as Ordinary least squares (OLS) and Generalized method of moments (GMM) analysis.

Findings: Findings in this paper suggest that the Fed’s balance sheet size, deflated by asset market wealth, presents evidence of return predictability during 1926–2015 that is robust against standard controls. These results can be explained through the redistribution of risk and the wealth channels of monetary policy transmission. The changing balance sheet size of a central bank (1) affects systemic risk, yields and expectations and (2) signals the future direction of monetary policy and thus economic outlook.

Research limitations/implications: The main implication of these findings is that policymakers should avoid a severe imbalance between a central bank’s balance sheet size and assets market wealth.

Originality/value: The empirical evidence in this paper documents a century-old relation between the Fed’s balance sheet size and US stock market return using the Fed’s balance sheet data for the last 100 years and stock market returns from the Center for research in security prices (CRSP) database.

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Series: Journal of economic studies
ISSN: 0144-3585
ISSN-E: 1758-7387
ISSN-L: 0144-3585
Volume: 49
Issue: 2
Pages: 259 - 273
DOI: 10.1108/JES-09-2020-0437
Type of Publication: A1 Journal article – refereed
Field of Science: 512 Business and management
Copyright information: © 2021, Asif M. Ruman. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at