Better understanding of how monetary policy impacts global financial markets
To aid in this understanding, the EU-funded IMPC (International monetary policy coordination and distress contagion) project applied three different research tracks. The first line of research focused on asset pricing repercussions of the co-movement in idiosyncratic risks. Project partners explored firms' technological networks by mapping the features of the network connecting firm-specific risks to common variation in asset prices and the cross-section of anticipated returns. Through the use of an equilibrium model with multiple risky assets, network connectivity was understood as transferring a distress state to other firms' fundamentals in a guided and timely way. They showed firms that transfer distress have lower price-dividend ratios and higher expected returns. Researchers proposed a network centrality measure, and used it to estimate corporate earnings. This helped to substantiate the theoretical connection between centrality and expected returns. They also maintained that network centrality provides a micro-foundation to the predictive power of size and book-to-market firm traits. The second involved international finance. The IMPC team studied the consequences of currency risk premia from news released by the Federal Open Market Committee (FOMC). It showed that during a short currency trading strategy, the American dollar and a diversified portfolio of foreign currencies earn considerable excess returns on days with scheduled FOMC meetings. The difference between announcement and no-announcement returns becomes larger during periods of high uncertainty and adverse economic conditions. A model was developed of an international long-run risk economy where asset prices respond to monetary policy revisions. A calibrated version was consistent with the cross-sectional pattern of currency risk premia observed in data. The final research line dealt with uncertainty in fiscal policy from an asset pricing standpoint. Project members proposed a dynamic general equilibrium model in which a public and a private sector coexist. This led to a novel model-implied measure of fiscal disagreement estimated from a large cross-section of forecasts on future budget deficits. Yet another calibrated version corresponded with findings. IMPC shed considerable light on asset pricing implications, international finance and fiscal policy uncertainty.
Keywords
Asset pricing, IMPC, international monetary policy, fiscal policy
