TY - JOUR
T1 - Show me the money
T2 - The monetary policy risk premium
AU - Ozdagli, Ali
AU - Velikov, Mihail
N1 - Funding Information:
The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of Boston, the Federal Reserve Bank of Richmond, or the Federal Reserve System. We thank Delina Agnosteva, Turan Bali, Ravi Bansal, Bruno Biais, Nina Boyarchenko (FRS Macro Meeting discussant), Andrea Buraschi, Yao Deng (FMA discussant), Wayne Ferson, Jose Fillat, Mike Gallmeyer (FDU discussant), Robin Greenwood, Francois Gourio (MFA discussant), Lars Hansen, Gur Huberman, Marcin Kacperczyk, Hayden Kane (IBEFA discussant), Emanuel Moench, Jonathan Newell, Robert Novy-Marx, Ricardo Nunes, Joe Peek, Carolin Pflueger, Nick Roussanov, Andreas Schrimpf (EFA discussant), Eric Swanson, Jenny Tang, Pietro Veronesi, Michael Weber, and seminar participants at CEPR ESSFM Gerzensee, EFA Mannheim, FDU Melbourne, FMA Boston, FRB Boston, FRB Richmond, FRS Committee on Macro Meeting, IBEFA San Diego, MFA Chicago, Penn State University, and Temple University for discussions and comments. We are particularly grateful to Jonathan Parker for detailed feedback and to Refet Gürkaynak for sharing intraday financial data. All mistakes are ours alone.
Publisher Copyright:
© 2019 Elsevier B.V.
PY - 2020/2
Y1 - 2020/2
N2 - We create a parsimonious monetary policy exposure (MPE) index based on observable firm characteristics that previous studies link to how stocks react to monetary policy. Our index successfully captures stocks’ responses to both conventional and unconventional monetary policy. Stocks whose prices react more positively to expansionary monetary policy (high-MPE stocks) earn lower average returns. This result is consistent with the notion that high-MPE stocks provide a hedge against bad economic shocks, to which the Federal Reserve responds with expansionary monetary policy. A long-short trading strategy designed to exploit this effect achieves an annualized Sharpe Ratio of 0.77.
AB - We create a parsimonious monetary policy exposure (MPE) index based on observable firm characteristics that previous studies link to how stocks react to monetary policy. Our index successfully captures stocks’ responses to both conventional and unconventional monetary policy. Stocks whose prices react more positively to expansionary monetary policy (high-MPE stocks) earn lower average returns. This result is consistent with the notion that high-MPE stocks provide a hedge against bad economic shocks, to which the Federal Reserve responds with expansionary monetary policy. A long-short trading strategy designed to exploit this effect achieves an annualized Sharpe Ratio of 0.77.
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U2 - 10.1016/j.jfineco.2019.06.012
DO - 10.1016/j.jfineco.2019.06.012
M3 - Article
AN - SCOPUS:85068267396
SN - 0304-405X
VL - 135
SP - 320
EP - 339
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -