MONETARY POLICY SURPRISES, INVESTMENT OPPORTUNITIES, AND ASSET PRICES. (September 2017)

• Record Type: Journal Article
• Authors: Detzel, Andrew
• Is Part Of: Journal of financial research. Volume 40:Number 3(2017)
• Page Start: 315
• Page End: 348
• Publication Date: 2017-09
• Subjects: Finance -- Periodicals; Investments -- Periodicals; 332
• DOI: 10.1111/jfir.12126
• Languages: English
• ISSNs: 0270-2592

Abstract

Abstract: Recent evidence shows that monetary policy announcements convey significant information about expected market returns and are therefore good candidates for innovations in intertemporal asset pricing state variables. I propose an asset pricing model with the market return and a mimicking portfolio for unexpected changes in the federal funds rate on days of Federal Open Market Committee announcements. This economically motivated two‐factor model prices portfolios formed on size, value, momentum, investment, and profitability with an R 2 of 80% and an average annual pricing error of 0.93%, performing as well as standard four‐, five‐, and six‐factor models designed to price these assets.