Show Me the Money: The Monetary Policy Risk Premium
Within the large strand of macroeconomics literature that studies monetary policy, a substantial subset examines the effects of monetary policy on asset prices. Because the most immediate effects of policy actions are felt in financial markets, understanding the differential responses in the cross-section of equities is crucial for our understanding of the broader impact of monetary policy. While there seems to be a consensus about the fact that monetary policy affects aggregate risk premia, its effects on the cross-section of risk premia are not as well understood. In this paper, the authors address this gap in understanding by developing a monetary policy exposure index at the individual-firm level, which they then use to study how monetary policy affects the cross-section of expected stock returns.