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Taking Stock: Monetary Policy Transmission to Equity Markets

This paper analyses the effects of U.S. monetary policy on stock markets.We present evidence that individual stocks react in a highly heterogeneous fashion to U.S. monetary policy shocks and relate this heterogeneity to financial constraints and Tobin's q. First, we show that there are strong industry-specific effects of U.S. monetary policy. Second, we also find that for the 500 individual stocks comprising the S&P500 the firms with low cash flows, small size, poor credit ratings, low debt to capital ratios, high price-earnings ratios, or a high Tobin's q are affected significantly more by monetary policy.