Monetary Policy and Equity Market Reactions: Linking Monetary Theory to Sector Level ETF Performance
Publication Date
2026
Abstract
This project examines how the economic framework of U.S. monetary policy translates into financial market outcomes by studying sector level equity responses to changes in the Federal Reserve’s effective federal funds rate. While monetary policy theory emphasizes how interest rates influence investment, borrowing costs and risk taking, financial markets reflect these mechanisms through asset prices. Exchange traded funds provide a useful lens for studying this connection, as they aggregate firm level behavior into tradable sector portfolios.
Using daily data from 2004 to 2025, this study analyzes eleven S&P 500 sector exchange traded funds to evaluate how monetary policy shocks are transmitted across different industries. The empirical framework estimates regression models that relate changes in the federal funds rate to sector price level movements while incorporating broad market and macroeconomic controls to isolate the independent effect of interest rate policy.
The project seeks to identify whether sectors differ systematically in their sensitivity to monetary policy based on their economic characteristics, such as capital intensity, leverage and exposure to interest rate conditions. By linking monetary theory to observed sector level ETF behavior, the study aims to clarify how abstract policy mechanisms operate through modern financial instruments.
The results show that sector responses to monetary policy vary significantly and are influenced by differences in leverage and valuation across industries.
Disciplines
Economics
Recommended Citation
Freedman, Joseph, "Monetary Policy and Equity Market Reactions: Linking Monetary Theory to Sector Level ETF Performance" (2026). Research Honors. 25.
https://digitalcommons.iwu.edu/all_honors/25