Monetary policy and the cross-section of expected stock returns

Gerald R. Jensen, Jeffrey M. Mercer

Research output: Contribution to journalArticlepeer-review

20 Scopus citations


Ample evidence shows that size and book-to-market equity explain significant cross-sectional variation in stock returns, whereas beta explains little or none of the variation. Recent studies also demonstrate that proxies for monetary stringency increase the explained variation in stock returns. We reexamine a three-factor model that includes beta, size, and book-to-market equity, while allowing monetary conditions to influence the relations between these risk factors and average stock returns. We find that ex-ante proxies for monetary stringency significantly influence the relations between stock returns and all three risk factors. Additionally, all three variables are found to contribute significantly to explaining cross-sectional returns in a three-factor model that includes the monetary sector.

Original languageEnglish
Pages (from-to)125-139
Number of pages15
JournalJournal of Financial Research
Issue number1
StatePublished - Mar 2002


  • JEL Classifications: E44, E52, G12


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