Money and Financial Markets
In a recent speech, Federal Reserve Board Governor Donald Kohn noted that the Federal Reserve pays “a lot of attention to financial market prices in the formulation of monetary policy.” He goes on to say that “[a]n important element in interpreting financial market prices is the identification of the risk premiums they contain.” By risk premium, Governor Kohn means the additional return required by investors for holding a risky security above the compensation that would be demanded by risk-neutral investors, who care only about expected returns.
Suggested citation: “Money and Financial Markets,” Federal Reserve Bank of Cleveland, Economic Trends, no. 05-08, pp. 06-07, 08.01.2005.