DISCOUNT RATE CHANGES AND SECURITY RETURNS IN THE US, 1962-1991

It is well-known that financial markets respond quickly to announcements of changes in the discount rate. We extend previous research and ask whether rate changes provide information about subsequent long-term market performance. Between 1962 and 1991, stock returns following discount rate decreases are higher and less volatile than returns following rate increases. The stock performance patterns are not due to changes in short or long-term bond rates.