Asset Allocation and Monetary Policy: Evidence from the Eurozone
AbstractThe eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by either real short-term interest rates or Taylor rule residuals varied substantially across countries in the period between 2003-2010. We use this cross-country variation in the (local) tightness of monetary policy conditions to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with lower real interest rates shift their portfolio investment out of the money market and into the riskier equity market. This produces the strongest equity price increase in countries where domestic institutional investors hold a large share of the countries' stock market capitalization.
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Bibliographic InfoPaper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 222013.
Length: 42 pages
Date of creation: Nov 2013
Date of revision:
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Monetary Policy; Asset Price Inflation; Risk Seeking; Taylor Rule Residuals;
Other versions of this item:
- Hau, Harald & Lai, Sandy, 2013. "Asset Allocation and Monetary Policy: Evidence from the Eurozone," CEPR Discussion Papers 9581, C.E.P.R. Discussion Papers.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-01-10 (All new papers)
- NEP-CBA-2014-01-10 (Central Banking)
- NEP-EEC-2014-01-10 (European Economics)
- NEP-MON-2014-01-10 (Monetary Economics)
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