Download The Role of Monetary Policy in Investment Management by Jensen, Robert R. Johnson, Jeffrey M. Mercer PDF

By Jensen, Robert R. Johnson, Jeffrey M. Mercer

Even though financial coverage is extensively believed to steer funding functionality, strangely little proof exists to verify the character or value of the relationship. during this monograph, the authors examine and record the relation among financial coverage and funding functionality. In reading the correlation among directional alterations within the expense and numerous asset periods, they unearth outstanding findings for U.S. inventory returns particularly.

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Rather, the industries with the most prominent patterns appear to be those that rely most heavily on discretionary consumer spending. In contrast, the industries with the smallest return patterns are those that generally represent essential goods for which spending is less a function of discretionary income. This evidence is consistent with the view that changes in monetary conditions coincide with changes in the availability of money for consumer spending. Hence, the industries that are more reliant on discretionary consumer spending appear to be more sensitive to changes in the monetary environment.

Furthermore, the patterns are shown to be both economically and statistically significant. This chapter highlights the results that have the most practical significance for investment professionals. General Findings In general, restrictive monetary conditions tend to depress the performance of most securities, whereas the majority of securities prosper during an expansive monetary policy. Common stocks exhibit the most extreme return patterns. Stock returns during expansive monetary periods are approximately four to five times higher than returns during restrictive monetary periods.

Consistent with the importance investment professionals place on asset allocation, this chapter examines the prevalence of similar return patterns for various subcategories of equity securities and investigates whether similar return patterns exist for commodity futures. One goal of tactical asset allocation (which is of particular interest in the context of this study) is to increase the relative portfolio weights of asset classes that are more likely to benefit from current monetary conditions.

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