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Establishing causation: Fed rate cuts and stock returns

You want to know the causal effect of a surprise Federal Reserve rate cut on equity returns. You cannot randomize monetary policy, and the Fed cuts because the economy is weakening, which itself moves stocks.

Describe how you would estimate the causal effect from observational data. Name at least two identification strategies and the key assumption each relies on.

Your answer

This one is open-ended. Work it through, then check your reasoning against the full solution.

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