Discount Factors and Monetary Policy: Evidence from Dual-listed Stocks

Coauthors: Quentin Vandeweyer, Minghao Yang

Paper
This paper studies the transmission of monetary policy to the stock market through investors’ discount factors. To isolate this channel, we investigate the effect of monetary policy surprises on the ratio of prices of the same stock listed simultaneously in Hong Kong and Mainland China, thereby controlling for revisions in cash-flow expectations. We find this channel to be strong but asymmetric, with effects being driven by surprise cuts. A 100 basis point surprise cut results in a 30 basis point increase in the ratio of stock prices over five days while hikes do not significantly affect this ratio. Those results are suggestive of significant slow-moving reductions in risk premia following accommodating surprises.