FRIC/Finance Seminar with John Campbell, Harvard University

FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with John Campbell, Harvard University

John Campbell will present:

Monetary Policy Drivers of Bond and Equity Risks

Authors:

John Y. Campbell, Harvard University
Carolin Pflueger, University of British Columbia
Luis M. Viceira, Harvard Business School

Abstract:

The exposure of US Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average in the period 1960-2011, it was unusually high in the 1980s and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper explores the effects of monetary policy parameters and macroeconomic shocks on nominal bond risks, using a New Keynesian model with habit formation and discrete regime shifts in 1979 and 1997. The increase in bond risks after 1979 is attributed primarily to a shift in monetary policy towards a more anti-inflationary stance, while the more recent decrease in bond risks after 1997 is attributed primarily to a renewed emphasis on output stabilization and an increase in the persistence of monetary policy. Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks.