Show me the money: The monetary policy risk premium

Ali Ozdagli, Mihail Velikov

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish (US)
JournalJournal of Financial Economics
DOIs
StateAccepted/In press - Jan 1 2019

Fingerprint

Monetary policy
Risk premium
Economic shocks
Hedge
Firm characteristics
Sharpe ratio
Stock prices
Federal Reserve
Trading strategies
Unconventional monetary policy

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

@article{25a62d5c72414ef3af73c2fe5f975a41,
title = "Show me the money: The monetary policy risk premium",
abstract = "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.",
author = "Ali Ozdagli and Mihail Velikov",
year = "2019",
month = "1",
day = "1",
doi = "10.1016/j.jfineco.2019.06.012",
language = "English (US)",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",

}

Show me the money : The monetary policy risk premium. / Ozdagli, Ali; Velikov, Mihail.

In: Journal of Financial Economics, 01.01.2019.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Show me the money

T2 - The monetary policy risk premium

AU - Ozdagli, Ali

AU - Velikov, Mihail

PY - 2019/1/1

Y1 - 2019/1/1

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.

UR - http://www.scopus.com/inward/record.url?scp=85068267396&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85068267396&partnerID=8YFLogxK

U2 - 10.1016/j.jfineco.2019.06.012

DO - 10.1016/j.jfineco.2019.06.012

M3 - Article

AN - SCOPUS:85068267396

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

ER -