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Monetary transmission and portfolio rebalancing: A cross-sectional approach
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DOI：10.1016/j.jfineco.2026.104324.png)
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Abstract
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We show that institutional portfolio rebalancing across asset classes plays a key role in transmitting monetary shocks to the stock market. Around FOMC announcements, ceteris paribus, a stock with 10-percentage-point higher ownership by rebalancing institutions experiences an additional 3.7-basis-point loss following a 10-basis-point surprise rate hike. We corroborate our mechanism by exploiting within-firm variations for dual shares, showing stronger price reactions at quarter- and month-ends when rebalancing is more imminent, and presenting placebo tests contrasting rebalancing institutions with other institutions. A concluding calibration suggests rebalancing could contribute roughly one-third to two-thirds of the aggregate stock market excess return response to monetary shocks.
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