Asset Allocation and Monetary Policy: Evidence from the Eurozone
Journal of Financial Economics, Vol. 120(2) (2016), 309-329
with Sandy Lai

Abstract

The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by real short-term interest rates varied substantially across countries in the period 2003—2010. We use this cross-country variation in the (local) tightness of monetary policy to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with decreased real interest rates shift their portfolio investment out of the money market and into the riskier equity market – causing significant equity price inflation in countries where investment home bias is the strongest.

Additional Files

The powerpoint slides of a seminar presentation are available here.

The data in this paper is available from the authors upon request.

Media Coverage

The paper is discussed in the ifo DICE report 1/2017 under the title Local Asset Price Dynamics and Monetary Policy in the Eurozone.