Monetary Policy and Risk-Based Asset Allocation

Alexis Flageollet () and Hamza Bahaji ()
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Alexis Flageollet: NATIXIS Asset Management
Hamza Bahaji: NATIXIS Asset Management

Open Economies Review, 2016, vol. 27, issue 5, No 3, 870 pages

Abstract: Abstract This paper focuses on the effects of the Fed’s monetary policy on stock and bond returns co-movement and their implications to risk-based asset allocation. Using a regime-switching model that controls for the economic effects of monetary policy we identify three co-movement regimes. We document that risk-based portfolio strategies poorly perform in the low correlation regime which features inflation shocks. We find outperformance evidence under the negative correlation regime with a high stock market risk and a very accommodating Fed policy. Less effectiveness is demonstrated under the positive correlation regime where bonds are regarded as risky assets and interest rate volatility is fueled by monetary policy.

Keywords: Monetary policy; Hidden Markov model; Co-movement; Minimum variance; Equal risk contribution (search for similar items in EconPapers)
JEL-codes: E22 E58 G11 G17 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11079-016-9404-1

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