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Abstract

The problem is that prior studies examining the impact of monetary policy instruments on the equity market have produced mixed results. The purpose of this study was to determine the impact of changes in money supply (M2), federal funds rate (FFR), and federal funds futures on the expected rate of returns of publicly traded companies. We developed and tested a multifactor capital asset pricing model and applied regression methodologies suitable for panel data analysis to analyze the data. The multiple regression results showed positive moderation effect of M2, and negative moderation and mediation effects of FFR and federal funds futures on the expected rate of returns of publicly traded companies. The socioeconomic implication of these findings is that the Federal Reserve decisions on changing M2 is not influenced by changes in the equity prices, but changes in the equity prices are a signal for the Federal Reserve to adjust its decision on changing the FFR.

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