Risk, Monetary Policy and Asset Prices in a Global World

Abstract

We study how monetary policy and risk shocks affect asset prices in the US, the euro area, and Japan, decomposing policy shocks into “pure” and information shocks.  For stock returns, we document strong spillovers of policy shocks between the US and the euro area, with spillovers emanating from the US (euro area) consistent with (stronger than) what global CAPM intuition would suggest. For short-term rates, there are no significant spillovers, consistent with the trilemma literature. Risk shocks matter greatly for stock returns, and feature a strong global component not driven by monetary policy.

Keywords: Risk, Uncertainty, Monetary policy, International spillovers, Global Financial Cycle, Stock returns, Bond returns, Interest rate

JEL Classification: E44, E52, G12, G20, E32