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MONETARY POLICY SURPRISES, INVESTMENT OPPORTUNITIES, AND ASSET PRICES
Author(s) -
Detzel Andrew
Publication year - 2017
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12126
Subject(s) - capital asset pricing model , economics , profitability index , portfolio , investment (military) , financial economics , asset (computer security) , momentum (technical analysis) , monetary economics , value (mathematics) , consumption based capital asset pricing model , monetary policy , finance , computer security , machine learning , politics , political science , computer science , law
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.