Zero Lower Bound Monetary Policy’s Effect on Financial Asset’s Correlations

Michael P. Hughes () and Karl Rogers
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Michael P. Hughes: Francis Marion University
Karl Rogers: Trinity College Dublin

International Advances in Economic Research, 2016, vol. 22, issue 2, No 3, 170 pages

Abstract: Abstract We investigate the hypothesis that zero lower bound monetary policy has an effect on the correlations of financial assets. Using an event-study approach, we evaluate the impact of the zero lower bound monetary policies of the Bank of Japan, the Bank of England, and the Federal Reserve on the bond and equity markets in Japan, the UK, the US, and the Eurozone. We evaluate the bond markets using the Japanese 10-year Sovereign bond (JGB), UK 10-year bond (Gilt), US 10-year Treasury note (T-note), and German 10-year bond (Bund). For the equity markets we use the Nikkei 225, FTSE 100, S&P 500, and Euro STOXX 600 as proxies for each regional market. We also include gold and silver as control commodities. Our analyses demonstrate significant changes not only in the evaluated assets’ correlations with each other, but also in their general behavior. This has major implications for investment portfolio construction and provides useful insight for financial service regulators and the central banks themselves in monitoring the fragility and stability of the financial system.

Keywords: Zero lower bound monetary policy; Financial markets; Portfolio construction (search for similar items in EconPapers)
JEL-codes: C10 F30 F39 G10 G15 G20 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s11294-016-9572-1

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