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Asset Co-movements: Features and Challenges
This paper documents and characterizes the time-varying structure of U.S. and international asset co-movements. Although some of the time variation could be genuine, the sampling uncertainty and time series properties of the series can distort significantly the underlying signal dynamics. We discuss examples that illustrate the pitfalls from drawing conclusions from local trends of asset prices. On a more constructive side, we find that the U.S. main asset classes and major international stock indices share a factor that is closely related to the business cycle. At even lower frequency, the ...
Show me the money: the monetary policy risk premium
We study how monetary policy affects the cross-section of expected stock returns. For this purpose, we create a parsimonious monetary policy exposure (MPE) index based on observable firm characteristics that are theoretically linked to how firms react to monetary policy. We find that stocks whose prices react more positively to expansionary monetary policy surprises earn lower average returns. This finding is consistent with the intuition that monetary policy is expansionary in bad economic times when the marginal value of wealth is high, and thus high MPE stocks serve as a hedge against bad ...