MONEY AND THE SHORT-RUN DETERMINATION OF STOCK PRICE
The purpose of this dissertation is to examine the short-run effects of the money supply on the determination of the stock price. An equilibrium stock price is derived given the stochastic evolution of the money supply. Empirical tests of the effects of anticipated and unanticipated money supply announcements on the stock price are performed. Two innovations are represented here. First, a theory of money supply and stock price is derived under conditions of investor maximization of preferences for risk and return, given market clearing, rational expectations and a prediction rule for the time path of the money supply. The theory predicts that the money supply will affect stock price if the monetary asset is risky, or if investors are risk-averse, or if investors expect the money supply's evolution through time to be other than white noise. Second, hypotheses of rationality and efficiency of stock prices relative to monetary data are separated and examined. For the pre-October 6, 1979 it is found that the the stock market did not rationally incorporate its forecast of the money supply into its valuation of equity. In this case, efficiency makes no sense. Updating expectations about the evolution of the money supply, it is found that, for the post-October 6, 1979 sample period, the stock market rationally and efficiently incorporates its forecast of the money stock announcement into the stock price. ^
WILLIAM GERALD FOOTE,
"MONEY AND THE SHORT-RUN DETERMINATION OF STOCK PRICE"
(January 1, 1984).
ETD Collection for Fordham University.