Asset Allocation and Monetary Policy: Evidence from the Eurozone

Hau, Harald; Lai, Sandy

doi:10.2139/ssrn.2293967

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Asset Allocation and Monetary Policy: Evidence from the Eurozone

Swiss Finance Institute Research Paper No. 13-39

EFA 2013 Cambridge Meetings Paper

AFA 2014 Philadelphia Meetings Paper

43 Pages Posted: 17 Jul 2013 Last revised: 25 Sep 2014

See all articles by Harald Hau

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Sandy Lai

University of Hong Kong

There are 3 versions of this paper

Date Written: September 20, 2014

Abstract

The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by real short-term interest rates varied substantially across countries in the period 2003-2010. We use this cross-country variation in the (local) tightness of monetary policy 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 decreased real interest rates shift their portfolio investment out of the money market and into the riskier equity market causing significant equity price inflation in countries where investment home bias is the strongest.

Keywords: Monetary Policy, Asset Price Ination, Risk Seeking, Taylor Rule Residuals

JEL Classification: G11, G14, G23

Suggested Citation: Suggested Citation

Hau, Harald and Lai, Sandy, Asset Allocation and Monetary Policy: Evidence from the Eurozone (September 20, 2014). Swiss Finance Institute Research Paper No. 13-39, EFA 2013 Cambridge Meetings Paper, AFA 2014 Philadelphia Meetings Paper, Available at SSRN: https://ssrn.com/abstract=2293967 or http://dx.doi.org/10.2139/ssrn.2293967