Monetary Policy Surprises, Investment Opportunities, and Asset Prices

50 Pages Posted: 11 Jan 2015 Last revised: 9 Apr 2017

See all articles by Andrew L. Detzel

Andrew L. Detzel

University of Denver - Daniels College of Business

Date Written: April 1, 2017

Abstract

Recent evidence shows that monetary policy announcements convey significant information about expected market returns and are therefore good candidates for innovations in intertemporal-asset pricing state variables. I propose an asset pricing model with the market return and a mimicking portfolio for unexpected changes in the federal funds rate on days of FOMC announcements. This economically motivated two-factor model prices portfolios formed on size, value, momentum, investment, and profitability with an R2 of 80% and an average annual pricing error of 0.93%-performing as well as standard four-, five- and six-factor models designed to price these assets.

Keywords: Monetary Policy, Cross-section of Stock Returns, ICAPM

JEL Classification: E44, G12

Suggested Citation

Detzel, Andrew L., Monetary Policy Surprises, Investment Opportunities, and Asset Prices (April 1, 2017). Paris December 2015 Finance Meeting EUROFIDAI - AFFI; Journal of Financial Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2547280 or http://dx.doi.org/10.2139/ssrn.2547280

Andrew L. Detzel (Contact Author)

University of Denver - Daniels College of Business ( email )

2101 S. University Blvd
Denver, CO 80208
United States

HOME PAGE: http://portfolio.du.edu/adetzel

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