Risk, asset pricing and monetary policy transmission in Europe: Evidence from a threshold-VAR approach

Jörg Schmidt

Journal of International Money and Finance, 2020, vol. 109, issue C

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.

Keywords: State-dependency; Asset pricing; Monetary policy (search for similar items in EconPapers)
JEL-codes: C11 E44 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:109:y:2020:i:c:s0261560620301911

DOI: 10.1016/j.jimonfin.2020.102235

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