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Asset Allocation and Monetary Policy: Evidence from the Eurozone

Listed author(s):
  • Harald Hau

    (University of Geneva and Swiss Finance Institute and Hong Kong Institute for Monetary Research)

  • Sandy Lai

    (The University of Hong Kong)

The 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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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 222013.

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Length: 42 pages
Date of creation: Nov 2013
Handle: RePEc:hkm:wpaper:222013
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