Risk, Monetary Policy and Asset Prices in a Global World

80 Pages Posted: 15 May 2020 Last revised: 19 Aug 2021

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Nancy R. Xu

Boston College, Carroll School of Management

Date Written: August 18, 2021

Abstract

We study how monetary policy and risk shocks affect major asset prices (short-term interest rates, stocks, long-term bonds) in three large economies, the US, the euro area, and Japan, since the turn of the century. Examining the impact of monetary policy on risk, monetary policy does not drive asset price cycles through a risk channel. Instead, we find a strong global common component in risk shocks which is not driven by monetary policy. Comparing the impact of monetary policy and risk shocks on asset prices across countries, monetary policy spillovers are economically more (less) important for interest rates and bond prices (stock prices) than risk shocks. The US generates relatively important monetary policy spillovers, but information shocks emanating from the euro area produce the strongest effects on international stock and bond markets. We provide suggestive evidence that monetary policy effects on asset prices reflect a persistent interest rate rather than a risk premium effect.

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

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

Suggested Citation

Bekaert, Geert and Hoerova, Marie and Xu, Nancy R., Risk, Monetary Policy and Asset Prices in a Global World (August 18, 2021). Available at SSRN: https://ssrn.com/abstract=3599583 or http://dx.doi.org/10.2139/ssrn.3599583

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Marie Hoerova

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://www.mariehoerova.net

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nancy R. Xu (Contact Author)

Boston College, Carroll School of Management ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://www.nancyxu.net

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