DP17432 Monetary-Based Asset Pricing: A Mixed-Frequency Structural Approach

Author(s): Francesco Bianchi, Sydney C. Ludvigson, Sai Ma
Publication Date: July 2022
Date Revised: July 2022
Keyword(s): Asset Pricing, beliefs, monetary policy, News
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17432

We integrate a high-frequency monetary event study into a mixed-frequency macro-finance model and structural estimation. The model and estimation allow for jumps at Fed announcements in investor beliefs, providing granular detail on why markets react to central bank communications. We find that the reasons involve a mix of revisions in investor beliefs about the economic state and/or future regime change in the conduct of monetary policy, and subjective reassessments of financial market risk. However, the structural estimation also finds that much of the causal impact of monetary policy on markets occurs outside of tight windows around policy announcements.