STATE DEPENDENCY OF BANK STOCK REACTION TO FEDERAL FUNDS RATE TARGET CHANGES

<heading id="h1" level="1" implicit="yes" format="display">Abstract</heading>We investigate the effects of changes in the federal funds target rate on bank stock returns through an event-study analysis. We examine the state dependency of such effects and focus on the surprise elements of policy changes derived from the federal funds futures market. Although we confirm an inverse relation between bank stock returns and changes in the federal funds target rate previously supported in the literature, we find that bank stock returns only respond to surprise or unexpected changes in the federal funds target rate. We also find that such responses are conditional on the context in which policy changes take place. Copyright (c) 2010 The Southern Finance Association and the Southwestern Finance Association.