Monetary Policy and Risk-Based Asset Allocation
Author | : Alexis Flageollet |
Publisher | : |
Total Pages | : 23 |
Release | : 2016 |
ISBN-10 | : OCLC:1306199542 |
ISBN-13 | : |
Rating | : 4/5 (42 Downloads) |
Download or read book Monetary Policy and Risk-Based Asset Allocation written by Alexis Flageollet and published by . This book was released on 2016 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper focuses on the effects of the Fed's monetary policy on stock and bond returns co-movement and their implications to risk-based asset allocation. Using a regime-switching model that controls for the economic effects of monetary policy we identify three co-movement regimes. We document that risk-based portfolio strategies poorly perform in the low correlation regime which features inflation shocks. We find outperformance evidence under the negative correlation regime with a high stock market risk and a very accommodating Fed policy. Less effectiveness is demonstrated under the positive correlation regime where bonds are regarded as risky assets and interest rate volatility is fueled by monetary policy.