Risk aversion and monetary policy in a global context

Juan M. Nave and Javier Ruiz

Journal of Financial Stability, 2015, vol. 20, issue C, 14-35

Abstract: We analyze the relationship between the stance of monetary policy and the implicit risk aversion in European Stock market prices in an international open-economy framework. We use a structural vector autoregression (SVAR) model that incorporates the effect of a factor that reflects the global monetary policy stance. We use shocks in the US Fed monetary policy stance as a proxy of this global factor. Our results indicate mixed evidence depending on whether simultaneity between domestic monetary policy stance and the stock market behavior is taken into full account. When this simultaneity is not allowed we confirm previous evidence found in the literature, extended to the international field: a lax monetary policy, both domestic and global, decreases risk aversion. However, when we take this into account, results indicate that a lax monetary policy increase in the short-run the risk aversion of the domestic representative investor.

Keywords: European stock market; International open-economy; Monetary policy; Risk aversion; Uncertainty (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:20:y:2015:i:c:p:14-35

DOI: 10.1016/j.jfs.2015.06.001

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