Investor sentiment and the stock market's reaction to monetary policy

This paper shows that monetary policy decisions have a significant effect on investor sentiment. The effect of monetary news on sentiment depends on market conditions (bull versus bear market). We also find that monetary policy actions in bear market periods have a larger effect on stocks that are more sensitive to changes in investor sentiment and credit market conditions. Overall, the results show that investor sentiment plays a significant role in the effect of monetary policy on the stock market. (C) 2009 Elsevier B.V. All rights reserved.