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Asset Allocation and Monetary Policy: Evidence from the Eurozone

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  • Harald Hau

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

  • Sandy Lai

    (The University of Hong Kong)

Abstract

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.

Suggested Citation

  • Harald Hau & Sandy Lai, 2013. "Asset Allocation and Monetary Policy: Evidence from the Eurozone," Working Papers 222013, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:222013
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    Cited by:

    1. Dufour, Alfonso & Stancu, Andrei & Varotto, Simone, 2017. "The equity-like behaviour of sovereign bonds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 25-46.
    2. repec:eee:ememar:v:31:y:2017:i:c:p:116-140 is not listed on IDEAS
    3. Bua, Giovanna & Dunne, Peter G., 2017. "The Portfolio Rebalancing Effects of the ECB's Asset Purchase Programme," Research Technical Papers 07/RT/17, Central Bank of Ireland.
    4. Gilbert COLLETAZ & Grégory LEVIEUGE & Alexandra POPESCU, 2016. "Monetary Policy and Long-Run Risk-Taking," LEO Working Papers / DR LEO 2409, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    5. Bubeck, Johannes & Habib, Maurizio Michael & Manganelli, Simone, 2017. "The portfolio of euro area fund investors and ECB monetary policy announcements," Working Paper Series 2116, European Central Bank.
    6. Chen, Minghua & Wu, Ji & Jeon, Bang Nam & Wang, Rui, 2017. "Monetary policy and bank risk-taking: Evidence from emerging economies," Emerging Markets Review, Elsevier, pages 116-140.
    7. Filippo Gori, 2016. "Disentangling the Monetary Policy Stance," Bank of Lithuania Working Paper Series 27, Bank of Lithuania.

    More about this item

    Keywords

    Monetary Policy; Asset Price Inflation; Risk Seeking; Taylor Rule Residuals;

    JEL classification:

    • 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

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