Journal article

Authors list: Schmidt, Joerg

Publication year: 2020

Journal: Journal of International Money and Finance

Volume number: 109

ISSN: 0261-5606

eISSN: 1873-0639

Open access status: Green

DOI Link: https://doi.org/10.1016/j.jimonfin.2020.102235

Publisher: Elsevier

Abstract: 
This paper investigates in how far monetary policy shocks impact European asset markets, conditional on different risk states. We distinguish between macroeconomic risk, economic-policy risk, and financial risk and separately extract three factors via principal component analysis from a set of candidate variables. These factors augment a threshold-vectorautoregressive model that contains assets and a short-rate. Impulse responses show that we indeed see state-dependency in the reaction of asset prices to monetary policy shocks. This indicates that asset markets distinguish between different types and states of risk. Investment-grade corporate bond yields show the most pronounced state-dependency if we distinguish between states of high and low economic-policy risk. Non-investment-grade corporate bond yields as well as equity of industrial firms face the strongest state-dependency for macroeconomic risk. Financial equity shows state-dependency for financial risk regimes. Further on, we illustrate that during periods of severe crisis, different risk regimes coincide. This impedes a clear delimitation among these three types of risk. As a consequence of our findings, monetary policy transmission via distinct asset prices highly depends on the degree of these different kinds of risk inherent in Europe. (C) 2020 Elsevier Ltd. All rights reserved.

Harvard Citation style: Schmidt, J. (2020) Risk, asset pricing and monetary policy transmission in Europe: Evidence from a threshold-VAR approach, Journal of International Money and Finance, 109, Article 102235. https://doi.org/10.1016/j.jimonfin.2020.102235

APA Citation style: Schmidt, J. (2020). Risk, asset pricing and monetary policy transmission in Europe: Evidence from a threshold-VAR approach. Journal of International Money and Finance. 109, Article 102235. https://doi.org/10.1016/j.jimonfin.2020.102235