Essays on Financial Markets and Monetary Policy

This thesis concerns financial markets and monetary policy. It consists of three chapters on the topics of insurance pricing, asset pricing and the economic effects of monetary policy respectively. The chapters can be read independently.
The first chapter considers the investment strategies of insurance companies and their impact on the pricing of insurance contracts. Our paper proposes and tests a new theory of insurance pricing, which we call “asset-driven insurance pricing”. Consistent with the theory, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurance premiums are lower when expected investment returns are higher, both in the cross section of insurance companies and in the time series. Our findings indicate that the assets and liabilities of insurance companies are more connected than previously thought.
The second chapter presents a new decomposition approach for stock returns that is based on the sensitivity of the stock price with respect to expected returns and dividends at various horizons. Our method splits unexpected stock returns into news about cashflows and news about discount rates using observables. This decomposition, which is computed from the prices of traded financial products, avoids many of the model-implied assumptions associated with standard decomposition approaches. We apply our new decomposition in 2020, shedding light on the evolution of the return on US stocks during the COVID crisis.
The third chapter considers the effects of monetary policy on the economy. I document rich heterogeneity in business cycles across U.S. states. As a result, state-level Taylor rules imply very different optimal monetary policies across states. To exploit the cross-sectional variation, I present a granular approach to monetary policy identification. The intuition behind the approach is that shocks to economic activity in one state can lead to changes in monetary policy, which are exogenous monetary policy shocks from the perspective of other states. I implement this approach in the United States and find large effects of monetary policy changes on future unemployment rates.