The Effects of U.S. Monetary Policy Shocks on Portfolio Diversification

Citation

Huang R, McMillan D & Kambouroudis D (2026) The Effects of U.S. Monetary Policy Shocks on Portfolio Diversification. Manchester School. https://doi.org/10.1111/manc.70059

Abstract
We investigate the impact of changes in U.S. monetary policy on portfolio diversification. We build four different types of portfolios, including a U.S.-only, a stock-bond (60/40) portfolio, an international diversified stock portfolio, and an asset diversified portfolio. Our assets include the S&P 500 index, a developed market index (MSCI EAFE), an emerging market index (MSCI EM), gold, oil, and U.S. 10-year Treasury notes (10-year T-Note). We provide the following evidence. First, U.S. monetary policy is a risk factor in these global asset markets. Second, the results demonstrate that these markets, except for the 10-year Treasury notes, are unlikely to react to anticipated monetary policy changes. Third, we suggest that risk-averse investors can use U.S. 10-year Treasury notes and choose the stock-bond portfolio to hedge risks when monetary policy is volatile, as we find that all stock indexes, gold and oil respond more to U.S. monetary policy surprises than 10-year Treasury notes. Fourth, all portfolios are negatively related to the monetary policy surprise, and we contend that U.S. monetary policy may be a systemic risk that cannot be fully diversified.

Keywords
monetary policy; portfolios; stocks; surprised

• The Effects of U.S. Monetary Policy Shocks on Portfolio Diversification